TERM 2 2000-01 EXAMINATION DEGREE OF BACHELOR OF BUSINESS MANAGEMENT

APRIL 2001

ACCT101 FINANCIAL ACCOUNTING INSTRUCTIONS TO STUDENTS 1 The time allowed for this examination paper is 3 hours. 2 This examination paper comprises 13 pages, 5 questions and 4 tables. 3 Answer all questions. 4 The total number of marks is 100.

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ACCT101 Question 1 Select the best answer to each of the questions below and write down the

corresponding letter (a, b, c or d) in your ANSWER BOOKLET. 2 marks will be awarded for each correct answer; ½ mark will be deducted for an

incorrect answer. This question carries a 30 marks

1. The journal entry to record depreciation expense is

(a) An application of the matching principle (b) A recognition of the loss in value of the asset (c) An offsetting credit either to Cash or Accounts Payable (d) A discretionary process of the management to reduce profits for the period.

2. The balance sheet provides information about

(a) The net resources which an entity has acquired, including information on

how these resources are financed (b) How the resources of an entity change over time (c) The profitability of the operations of the entity (d) The total amount of cash available at the end of the accounting period.

3. Which one of the following is true: (The financial year runs from 1 January 2000

to 31 December 2000)

(a) The income statement reports the results of the earning activities of the entity for the year ended 31 December 2000

(b) The income statement shows the financial position of the entity as at 31 December 2000

(c) The balance sheet shows the earning activities of the entity for the year ended 31 December 2000

(d) The balance sheet shows the financial position of the entity for the year ended 31 December 2000

4. Revenue is recognized when earned and expenses are recognized when incurred,

regardless of the time cash is received or paid. This is the application of:

(a) Cash basis accounting (b) Accrual basis accounting (c) The matching process (d) The cash flow principle

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ACCT101 5. Which one of the following statements best describes why increases in expenses

are recorded as debits:

(a) Because expenses decrease cash (b) Because expenses are liabilities (c) Because expenses increase assets (d) Because expenses decrease owner’s equity

6. Which one of the following pairs cannot occur in the same simple journal entry:

(a) Increase in assets; increase in revenue (b) Increase in expense; decrease in assets (c) Decrease in assets; decrease in liabilities (d) Decrease in liabilities; increase in expense

7. A trial balance will not balance if:

(a) The collection of $100 cash is recorded by a debit to cash and a credit to

accounts payable (b) A cash purchase of machinery is recorded as a debit to repairs and a credit

to cash (c) A ledger account with a credit balance is listed as a debit amount in the trial

balance (d) A purchase of a computer for $2,000 is entered as a debit of $200 to office

equipment and a credit of $200 to accounts payable

8. A $1,500 invoice for office equipment purchased on credit was incorrectly entered as a $1,500 purchase of inventory on credit. An adjusting entry would be:

(a) Debit office equipment $1,500; credit accounts payable $1,500 (b) Debit office equipment $1,500; credit inventory $1,500 (c) Debit inventory $1,500; credit accounts payable $1,500 (d) Debit inventory $1,500; credit office equipment $1,500

9. Which one of the following cannot occur during an accounting period:

(a) A net profit earned and cash decreased (b) Owner’s equity decreased and assets increased (c) Liabilities and owner’s equity increased and assets decreased (d) A net profit earned and owner’s equity decreased

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ACCT101 10. ABC Ltd uses accrual basis of accounting. In 2000, the company reported $41,000

in salaries expense on the Income statement. Its comparative balance sheet showed salaries payable of $800 at year-end 1999 and $2,400 at year-end 2000. If the company were to use cash basis accounting, what would be the salaries expense for 2000?

(a) $39,400 (b) $41,000 (c) $41,800 (d) $42,600

11. XYZ Ltd purchased a car costing $85,000 when it started operation at the

beginning of this year. Terms of the transaction were $5,000 down payment and the balance in 5 equal annual payments. At the current year end, the company should charge to expense:

(a) The entire cost of the car (b) The portion of the cost that was paid for in the current year (c) No part of the cost as it is not completely paid for (d) The portion of the cost based on its usage this year.

12. Which one of following occurs when inventory is sold:

(a) Increase a liability and an asset (b) Decrease a revenue and a liability (c) Increase an asset and decrease a liability (d) An asset and a revenue increase at the same time

13. On 1 January 2000, SCL Ltd had a credit balance of $3,100 in the Allowance for

Bad Debts Account. During the year 2000, $6,900 was written off as bad debts. Aging analysis of accounts receivable at 31 December 2000 indicated that the amount of probable uncollectibles would be $5,300. What would be the amount of Bad Debt expense for 2000?

(a) $9,100 (b) $6,900 (c) $5,300 (d) $2,200

14. The primary purpose for using an inventory flow assumption, e.g. FIFO is to:

(a) Be in line with the physical flow of inventory (b) Minimize income tax liability (c) Be compatible with the perpetual inventory system (d) Offset against revenue an appropriate cost of goods sold

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ACCT101 15. In January 2001, the accountant of Ace Products Ltd was in the process of

determining the approximate cost of inventory as at 31 December 2000 for the purpose of preparing the financial statements for the year 2000.

The physical inventory was last taken on the 20 December 2000. The following additional information is as below:

Physical inventory as at 20 December 2000 $875,000 Transactions for the period 21 December to 31 December 2000: Sales of inventory $600,000 Purchases of inventory $350,000 The normal gross margin on sales averaged 40%.

Using the gross profit method, the approximate inventory at 31 December 2000 was: (a) $875,000 (b) $865,000 (c) $625,000 (d) $360,000

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ACCT101 Question 2 The Instant Photo Studio is located at a busy shopping center, processing film for customers within an hour, using high-tech processing and developing equipment. A typical monthly Income Statement shows the following:

Revenue Processing fees earned $33,500 Operating Expenses Salaries $ 3,500 Rent 12,000 Materials and Supplies 1,600 Equipment depreciation 6,000 Other expenses 1,400 $24,500 Net Income $ 9,000

1. All processing fees are received in cash. There are no credit customers. Apart

from Equipment Depreciation, all expenses are paid in cash. 2. The lease for the premises will expire in 9 months. The owner of the shopping

center has indicated that a 10% increase in rental will be imposed upon the renewal of the lease for a further 3 years.

3. The equipment is one year old and is being depreciated over its estimated useful life of 3 years, using the straight-line method. However, it is envisaged that it can still be productive beyond the end of its estimated useful life. More efficient equipment is expected to come online within a year. The estimated cost of the new equipment is $300,000.

4. Although digital cameras have become increasingly popular in Singapore, revenue has not been adversely affected over the last few years, as many Singaporeans still prefer hard copy photographs.

5. The owner of Instant Photo Studio plans to sell the business for $400,000 and is willing to accept a cash payment of $112,000 plus 36 monthly installment payments of $8,000 each.

Your good friend, David Tan is very keen to buy the business. Although he feels that the sales price is reasonable, he is worried about the monthly payments, as the business will leave him with only $1,000 to cover his personal monthly expenditure of about $3,500. Required: (a) Explain to David the nature of depreciation expense. ( 8 marks) (b) Prepare a statement showing how much cash the business will generate in the

next 12 months. Will the amount be sufficient to cover David’s personal expenditure for the year? ( 8 marks)

(c) Do you agree with David that the business is a “good buy”? Your answer must

include the need to replace the existing equipment, the expenditure that might occur and the timing of such expenditure. ( 6 marks)

(Total: 22 marks)

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ACCT101 Question 3 Smartie Maddie (SM) was incorporated in Singapore with an authorized capital of $5,000,000, divided into 10,000,000 shares of $0.50 each. The company operates as a distributor of integrated chips and printed circuit boards and uses the periodic system to record its inventory. At 31 December 2000, the following trial balance was prepared.

$’000 $’000 Net sales 8,454Inventory, at cost 1 January 2000 1,300 Purchases 6,600 General & Administrative expenses 288 Selling & Distribution expenses 845 Allowance for bad debts as at 1 January 2000 33Interim dividend paid 135 Building, at cost 2,000 Accumulated depreciation – building 800Equipment, at cost 710 Accumulated depreciation – equipment 300Accounts receivables 1,220 Cash 189 Accounts payable 35010% 5-year Loan 500Share capital 2,000Share Premium 400Retained earnings 450Total 13,287 13,287

You are given the following additional information: (1) On 28 December 2000, a supplier shipped merchandise costing $20,000 to the

company on FOB destination terms. This item was included in the purchases for 2000 but no payment was made. The goods arrived on 8 January 2001.

(2) The company received $154,000 cash from a new customer in December 2000 for an order of merchandise to be delivered in January 2001. This item was incorrectly treated as a sale in 2000. The cost of the above merchandise of $70,000 was excluded from the year-end's physical inventory count.

The total value of the inventory arising from the physical inventory count on 31 December 2000 amounted to $1,530,000.

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ACCT101

(3) An analysis of the accounts receivable at 31 December 2000 produced the following:

Age category (Receivables) Allowance for Bad debts 1 to 30 days 31 to 60 days 61 to 90 days 91 to 120 days Over 120 days Total

400,000250,000350,000120,000

100,000$1,220,000

0 2,500

17,500 12,000

20,000 $52,000

In addition, customers' accounts amounted to $50,000 were to be written off.

(4) On 1 July 2000 SM borrowed from its bankers a $500,000 Loan. No interest had so far been provided.

Loan interest should be shown as a separate item in the Income Statement.

(5) The company's depreciation policy on long term assets was as follows:

(i) Building: straight line over 20 years on cost (ii) Equipment: straight line over 10 years on cost

(6) The company prepared the following bank reconciliation statement as at 31 December 2000.

Credit Balance per Bank Statement Add: Deposits in Transit Less: Outstanding Cheques Balance per the Cash Book Unadjusted balance per Cash Book Less: Bank Service charge Adjusted cash book balance

$212,000 35,000 247,000 60,000 187,000

$189,000 2,000 187,000

The bank charges are to be classified under General & Administrative expenses.

(7) The directors of the company declared a final dividend of 10% less tax of 25% for the year ended 31 December 2000.

(8) Provide 25% tax on the net income for the year.

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ACCT101

Required

(a) Prepare adjusting entries (narrations not required) for items (1 to 7) necessary for the preparation of SM’s financial statements for the year 2000. Show workings where appropriate. (12 marks)

(b) Prepare in statement form:

(i) SM’s Income Statement for the year ended 31 December 2000 ( 7 marks)

(ii) SM’s Balance Sheet as at 31 December 2000. ( 7 marks)

(Total: 26 marks) Question 4 PQR Ltd issued $500,000 of 8% 5-year Bonds on 1 January 2000. Interest is payable semiannually on 1 July and 1 January. The prevailing market rate of interest for similar type of Bonds is 6%. The company uses the effective rate to amortize the premium. Required (i) Determine the issue price of the Bonds. (Calculate to the nearest $)

( 4 marks) (ii) Prepare the journal entries to record

(a) The issue of Bonds on 1 January 2000 (b) The interest payment on 1 July 2000

( 4 marks) (iii) Show the Bonds liability as at 1 July 2000

( 2 marks) (Total: 10 marks)

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ACCT101

Question 5

The comparative financial statements of Big Deal Business Limited (BDBL) as at 31 March 2000 and 2001 are appended below:

BDBL Balance Sheet as at 31 March

2001 ($) 2000 ($) Cash at bank Account receivable Inventories Land Plant and Equipment Less Accumulated Depreciation Investments Share Capital, fully paid ($1 each) Share Premium Retained Earnings Long-term Loan Accounts Payable Dividends Payable Tax Payable

225,000 359,400381,300383,800

1,278,000 536,400 741,600 -

2,091,100

1,080,00098,200

435,900-

225,000162,000

90,0002,091,100

279,400312,000325,800

-990,000 428,400 561,600

290,0001,768,800

900,00043,200

324,600100,000198,000136,000

67,0001,768,800

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ACCT101

Income Statement for year ended 31 March 2001

Sales Less: Cost of Goods Sold Beginning Inventories Add: Net Purchases Less: Closing Inventories Gross Margin Operating Expenses Depreciation Other operating expense Operating Income Other Income Gain on sale of investments Net Income before tax Tax expense Net Income after tax Retained Earnings of previous years Proposed dividends Retained Earnings

$ 325,8002,182,2002,508,000 381,300

108,000

1,008,000

$3,582,000

2,126,7001,455,300

1,116,000339,300

24,000363,300 90,000273,300324,600597,900162,000

$435,900 The following additional information was taken from the records of BDBL: (1) The investments were sold for $314,000. (2) The ordinary shares were issued at a premium for cash and all monies were

received. (3) There were no disposal of plant and equipment during the year. (4) All plant and equipment and the land were acquired for cash. (5) All purchases and sales during the year were made on credit.

Required

Prepare a statement of cash flows of the company for the year ended 31 March 2001. Show all workings. (You may use either the Direct or Indirect method to calculate the operational cash flow) (12 marks)

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ACCT101 Present Value of $1 at the end of t years = 1/(1+r)^t Number of years

3%

4% 5% 6% 7% 8% 9% 10% 11% 12%

1 0.9709 0.9615 0.9524 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 0.9426 0.9246 0.9070 0.890 0.873 0.857 0.842 0.826 0.812 0.797 3 0.9151 0.8890 0.8638 0.840 0.816 0.794 0.772 0.751 0.731 0.712 4 0.8885 0.8548 0.8227 0.792 0.763 0.735 0.708 0.683 0.659 0.636 5 0.8626 0.8219 0.7835 0.747 0.713 0.681 0.650 0.621 0.593 0.567 6 0.8375 0.7903 0.7462 0.705 0.666 0.630 0.596 0.564 0.535 0.507 7 0.8131 0.7599 0.7109 0.665 0.623 0.583 0.547 0.513 0.482 0.452 8 0.7894 0.7307 0.6768 0.627 0.582 0.540 0.502 0.467 0.434 0.404 9 0.7664 0.7026 0.6446 0.592 0.544 0.500 0.460 0.424 0.391 0.361

10 0.7441 0.6756 0.6139 0.558 0.508 0.463 0.422 0.386 0.352 0.322 11 0.7224 0.6496 0.5847 0.527 0.475 0.429 0.388 0.350 0.317 0.287 12 0.7014 0.6246 0.5568 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

3%

4% 5% 6% 7% 8% 9% 10% 11% 12%

1 0.9709 0.9615 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 2 1.9135 1.8861 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 3 2.8286 2.7751 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 4 3.7171 3.6299 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 5 4.5797 4.4518 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 6 5.4172 5.2421 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 7 6.2303 6.0021 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 8 7.0197 6.7327 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 9 7.7861 7.4353 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328

10 8.5302 8.1109 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 11 9.2526 8.7605 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 12 9.9540 9.3851 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194

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ACCT101 Future value: Amount of $1 Due in n Periods Number of years

3%

4% 5% 6% 7% 8% 9% 10% 11% 12%

1 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100 1.110 1.120 2 1.061 1.082 1.103 1.124 1.145 1.166 1.188 1.210 1.232 1.254 3 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.331 1.368 1.405 4 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.464 1.518 1.574 5 1.160 1.217 1.276 1.338 1.403 1.469 1.539 1.611 1.685 1.762 6 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772 1.870 1.974 7 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949 2.076 2.211 8 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144 2.305 2.476 9 1.305 1.423 1.551 1.689 1.838 1.999 2.172 2.358 2.558 2.773

10 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594 2.839 3.106 11 1.384 1.540 1.710 1.898 2.105 2.332 2.580 2.853 3.152 3.479 12 1.426 1.601 1.796 2.012 2.252 2.518 2.813 3.138 3.498 3.896

Future value: Amount of an annuity of $1 per Number of payments

Number of years

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 2 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2.100 2.110 2.120 3 3.091 3.122 3.153 3.184 3.215 3.246 3.278 3.310 3.342 3.374 4 4.184 4.247 4.310 4.375 4.440 4.506 4.573 4.641 4.710 4.779 5 5.309 5.416 5.526 5.637 5.751 5.867 5.985 6.105 6.228 6.353 6 6.468 6.633 6.802 6.975 7.153 7.336 7.523 7.716 7.913 8.115 7 7.663 7.898 8.142 8.394 8.654 8.923 9.200 9.487 9.783 10.0898 8.892 9.214 9.549 9.897 10.260 10.637 11.028 11.436 11.859 12.3009 10.159 10.583 11.027 11.491 11.978 12.488 13.021 13.579 14.164 14.776

10 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.937 16.722 17.54911 12.808 13.486 14.207 14.972 15.784 16.645 17.560 18.531 19.561 20.65512 14.192 15.026 15.917 16.870 17.888 18.977 20.141 21.384 22.713 24.133

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