ACCT101 2000-01 T1

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TERM 1 2000-01 EXAMINATION

DEGREE OF BACHELOR OF BUSINESS MANAGEMENT

NOVEMBER 2000

ACCT101 FINANCIAL ACCOUNTING

INSTRUCTIONS TO STUDENTS

1 The time allowed for this examination paper is 3 hours.

2 This examination paper comprises five (5) questions and two (2) tables, andconsists of eleven (11) pages.

3 Answer ALL questions.

4 The total number of marks is 100.

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Question 1

Select the best answer to each of the questions below and write down thecorresponding letter (a, b, c or d) in your ANSWER BOOKLET.

2 marks will be awarded for each correct answer; ! mark will be deducted for an

incorrect answer. This question carries a 30 marks

1. The accounts of A Ltd as at 30 June 2000 show the followings:Overdraft balance of $3,000 Notes payable of $2,500

Notes receivable of $3,500 Accounts payable of $4,300Service revenue of $7,000 Prepaid rent of $1,500Unearned revenue $4,000 Warranty liability $900Allowance for bad debts 800 Rent Expense of $1,800.

Based on the above data, how much are its total liabilities?a)

$6,800 b) $9,800c) $10,800d) $14,700

2. Cash-basis accountinga) results in a higher income being reported than accrual-basis accounting

b) results in a lower income being reported than accrual-basis accountingc) leads to the reporting of more complete information than does accrual basis

accounting

d) is not acceptable under generally accepted accounting principles

3. A firm received $6,000 in advance for services to be rendered later. Theaccountant debited Cash and credited Unearned Revenue for $6,000. At the endof the accounting period, $1,100 remains unearned. The end of period adjustingentry will bea) debit unearned revenue and credit revenue for $4,900

b) debit unearned revenue and credit revenue for $1,100c) debit revenue and credit unearned revenue for $4,900d)

debit revenue and credit unearned revenue for $1,100

4. The classification of assets and liabilities as current or long-term depends ona) whether they appear on the balance sheet or the income statement

b) the relative liquidity of the itemsc) the T-format or report format of the balance sheetd) whether they are permanent or temporary accounts

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5. Sales total $880,000, cost of goods sold is $420,000, selling expenses are$100,000, operating expenses are $220,000 and non-operating expenses are$30,000 and non-operating revenue $50,000. How much is net income?a) $380,000

b) $280,000

c) $160,000d) $30,0000

6. The closing entry for Purchase Discounts under the periodic inventory system isa) Dr. Purchase Discounts & Cr. Retained Earnings (Income Summary)

b) Dr. Purchase Discounts & Cr. Inventoryc) Dr. Retained Earnings (Income Summary) & Cr. Purchase Discountsd)

Dr. Inventory & Cr. Purchase Discounts.

7. Which of the following bank reconciling items requires adjusting journal entriesto the accounts of the company?

a) error in the books of the company b) outstanding chequesc) outstanding depositsd) error in the bank statement

8. At 1 January 1999 the balance in the Allowance for Bad Debts account was$14,300. On 31 July 1999, $24,000 of accounts receivable was written off. On 28August 1999, the company recovered $42,500 of accounts receivable previouslywritten off. The aging of the accounts indicates that an allowance of $78,900 isneeded for 1999. The bad debt expense for 1999 isa) $18,500

b) $64,600c) $74,700d) $46,100

9. XYZ Ltd is a defendant in a lawsuit for damages of $55,000. On the balancesheet date, it appears highly likely that the Court will render a judgment againstthe company. How would XYZ report this event in its financial statements?a) omits this item as no judgment has been rendered

b) discloses the item as a contingent liability in a note to the balance sheetc) omits the item, as the amount is less than $100,000.

d) reports the loss in the income statement and a liability in the balance sheet

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10. SCL Ltd sold an investment at a profit of $44,000. The investment accountreports a beginning balance of $208,000 and an ending balance of $182,000.During the year, the company purchased new investments costing $62,000. Whatwere the proceeds from the sale of investments?a) $44,000

b) $88,000c) $114,000d) $132,000

11. Which of the following is not a contra account?a) Provision for warranty

b) Provision for depreciation (Accumulated depreciation)c)

Provision (Allowance) for bad debtsd) None of the above

12. The aging of accounts receivable to determine the amount of doubtful debts

a) follows the matching principle closely b) assumes that the likelihood of collection from a current debt is not as good as

from a non-current debtc) tends to give a better estimate of uncollectible accounts than other methods, as

consideration is give to the collectibility of all accounts receivabled) all of the above

13. The inventory costing method that closely matches current cost of goods soldwith current revenue isa) LIFO method

b) FIFO methodc)

Weighted-average costd) All the above

14. Travel Ltd with a financial year-end of 31 December, purchased a motorcar on 1July 1994 that costs $100,000. The estimated useful life of the motorcar at thetime of acquisition was 10 years with an estimated residual value of $10,000.Travel Ltd sold the car on 30 June 2000 for $34,000. Determine the loss arisingfrom the disposal assuming that depreciation is on a straight-line basis.a) Loss on disposal of $12,000

b)

Loss on disposal of $ 6,000

c)

Loss on disposal of $66,000d)

Loss on disposal of $20,000

15. Under the revenue recognition principle, revenue is recogniseda) at the earliest acceptable time

b) at the latest acceptable timec)

after it has been earned and collectibility is assuredd) when there is no doubt at all with the collection of cash

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Question 2

James and Grace are considering the purchase of the business of Compass Limited.The company provides consulting services to small and medium enterprises. They areshown the company’s income statements. Details are as below:

Compass Limited

Income Statements

For the year ended 31 December

1999 1998

Unaudited Audited

Revenues:

Consulting services 345,000 225,000Commissions on sales of equipment 75,000 420,000 85,000 310,000

Expenses:

Salary expense 120,000 100,000Rent and Utility expense 36,000 36,000Interest expense 26,000 18,600Promoting and advertising expense 28,000 15,000Office expense 8,000 6,000Insurance expense 3,000 2,400Depreciation expense 4,000 225,000 4,000 182,000

Net income before tax 195,000 128,000Income tax at 26% 50,700 33,280

Net income for the year 144,300 94,720EPS $1.44 $0.95 They appoint you to audit the accounts for the year 1999. You discover the following:

1.

Consulting services revenue includes a receipt of $24,000 on 1 October 1999for work to be completed by 31 March 2000.

2.

The company was owed at 31 December 1999 $2,000 commission by anoriginal equipment manufacturer.

3. The 2 directors of the company Mr. and Mrs. Leong Ah Lek had not been paidtheir December 1999 salary of $5,000 and $4,000 respectively. The amountswere not been included in the salary expense for the year. (Ignore CPF)

4.

A new equipment purchased on 1 July 1999, costing $10,000 had not been

depreciated. The company usually depreciates its equipment over 3 years on90% of the cost of the equipment, using the straight-line method.5. The insurance expense includes a fire insurance policy that covers the period

from 1 July 1999 to 30 June 2000. The premium on this policy was $1,200.

Required:

(a) Prepare a new Income Statement for the year ended 31 December 1999, takinginto account the necessary adjustments to reflect more accurately the results ofthe operations. (10 marks)

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(b)

Based on the information at hand and any other information you may require,advise James and Grace on the offer to purchase the business of CompassLimited.

(6 marks)Total: 16 marks

Question 3

SCL Limited uses historical cost accounting. The following events took place in1999:

(a)

A new office photocopier was purchased at an auction for $8,000. Asimilar machine would cost $15,000 if purchased new from thecompany’s usual supplier.

(b)

Three days before the financial year-end, the company entered into anagreement with a customer for the sale of a specialized inventory itemto be delivered in the following year. The contract value was $60,000.The company received a deposit of $25,000 and the balance to bereceived on delivery of the inventory.

(c) A customer sued the company for damages on the ground that one ofthe company’s products, which he earlier purchased from a retail outletcaused him to gradually lose his sight. The legal advisor to thecompany was of the opinion that this was a frivolous suit with little orno chance of success.

(d) One of the company’s warehouses was destroyed in a fire. The losscomprised the following:

Warehouse, at cost $600,000Less accumulated depreciation 250,000 $350,000

Inventory stored at the warehouse, at cost 400,000Total $750,000

The company had accepted the offer of $600,000 as compensationfrom the insurance company.

Required:

How would each of the above items (a, b, c and d) be treated/recorded in theaccounts of the company at the year-end?

12 marks

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Question 4

(a) On 1 January 1999, KTA Ltd signed a non-cancelable agreement to lease amachine from Singapore Leasing Corporation. The agreement requires

payments of $20,000 on 30 June and $20,000 on 31 December each year for 6

years. At the end of the lease period, KTA will own the machine. Theapplicable interest rate was 10%. KTA paid the first two installments of$20,000 each in 1999. The company usually depreciates similar machine on90% of the cost over 8 years, using the straight-line method.

Required:

(i)

Use journal entries to record the above in the books of the companyfor the year 1999. (Round up to the nearest $)

(ii)

Show how the lease is disclosed in the balance sheet at the year-end.

(8 marks)

(b) TTK Ltd, an equipment manufacturer is in financial difficulty. Anothercompany that has its own exclusive suppliers and contractors has just acquiredits main customer. TTK has since been advised that its current contract withthe customer will be terminated forthwith. In addition, TTK requires extensiveretooling of its manufacturing facilities. Cash flow from current operation isnegative. The CEO is considering two proposals: (i) a 5-year term loan at aninterest rate of 12%, to be secured by the leasehold property of the company.The current prime rate is 6%. (ii) a bond issue carrying a coupon rate of 10%.There is a risk that the bonds may have to be discounted.

Required:

Which financing alternative would you recommend to the company?(6 marks)

Total: 14 marks

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Question 5

The Balance sheet of Evans Limited as at 1 January 1999 shows the following:

$’000

Current AssetsCash at bank and on hand 436Trading securities 390Accounts receivable 450Inventory, at cost 520

1,796Non Current Assets

Leasehold buildings, at cost 1,350Less Accumulated depreciation (675)

Equipment, at coat 600Less Accumulated depreciation (350)

Shares in GLC Limited, at cost 3301,255

Total Assets $3,051

Current liabilities

Accounts payable 560Dividends payable 178Income tax payable 456

1,194Long term liabilities

Mortgage payable 350

Owners’ equity

Share capital ($1 par value) 1,200Share premium 220Retained earnings 87

1,507

Total Liabilities and Owners’ Equity $3,051

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The audited Income Statement for the year ended 31 December 1999 is set out below:

$’000 $’000

Operating revenue

Sales revenue (net) 8,000Less Cost of Goods sold 4,500Gross Margin 3,500Operating expenses

Operating expenses (other than below) 1,120Depreciation expense on leasehold buildings 309Depreciation expense on equipment 125 1,554Operating income 1,946Other Operating revenue

Profit from sale of trading securities 250Profit from sale of equipment 6

Dividends received 24 280Net Income before tax and dividends 2,226Income Tax 568Net Income after tax 1,658Dividends: Interim 118

Proposed 237 355Net income for the year 1,303Add retained earnings of previous years 87Total retained earnings at 31 December 1999 $1,390

The following additional information is provided:

1. At 31 December 1999, $635,000 of the accounts receivable remaineduncollected and accounts payable of $660,000 had not been paid.

2. Inventory as at 31 December 1999 was determined at $680,000.3

The company sold part of the trading securities for $400,000 during the year.The remaining trading securities at the year-end had a cost of $240,000.

4 Equipment costing $300,000 with an accumulated depreciation of $80,000was sold for $226,000. New equipment was purchased to bring the cost ofequipment to $900,000 at the year-end.

5. Additional leasehold buildings of $1,218,000 were purchased in 1999.

6.

The company made a further investment of $95,000 in GLC Limited in 1999.7.

A freehold land adjacent to the company’s current premises was acquired for$1,056,000 in 1999.

8.

During the year, the company paid $431,000 in taxes and $296,000 individends, including the interim dividend of $118,000.

9. The long-term liability, mortgage payable was discharged before the year-end.10.

During the year the company issued 400,000 new shares to its existingshareholders at $2 per share.

11.

At 31 December 1999, the company had an overdraft balance of $25,000.

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Required:

(a) Prepare the balance sheet of Evans Limited as at 31 December 1999(10 marks)

(b) Prepare the cash flow statement for the year ended 31 December 1999

(12 marks)(c) The directors of the company were concerned that although the net income for

the year was at a record high of $1,303,000, the company still had an overdraft balance of $25,000 at the year-end. Explain how such a position can occur.

(6 marks)

Total: 28 marks

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Present Value of $1 at the end of t years = 1/(1+r)^t

Number of years 5% 6% 7% 8% 9% 10% 11% 12%

1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.8932 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797

3 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712

4 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636

5 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567

6 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507

7 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452

8 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404

9 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361

10 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322

11 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287

12 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257

Annuity table: Present Value of $1 per year for each of t years

Number of years 5.% 6% 7% 8% 9% 10% 11% 12%

1 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893

2 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690

3 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402

4 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037

5 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.6056 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111

7 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564

8 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968

9 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328

10 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650

11 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938

12 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194

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