ACCT101 2001-02 T1

Term 1 2001-2002 Examination November/December 2001

ACCT101 FINANCIAL ACCOUNTING

Instructions: 1. This paper consists of two parts, Part A and Part B, printed on a total of 12 pages (for a

total of 100 marks). PLEASE CHECK BEFORE COMMENCING. This is a FINAL paper.

2. The time allowed for this examination paper is 3 (three) hours. 3. Part A consists of 3 questions (70 marks). You are to answer ALL questions and show

ALL relevant calculations. 4. Part B consists of 15 Multiple Choice Questions (30 marks). You are to write in your

answer booklet the most appropriate answer. Each correct answer is worth 2 marks and a penalty of ½ marks will be applied to any incorrect answer.

ACCT101 – Financial Accounting Term 1 2001/2

PART A (3 questions, total 70 marks)

Question 1 (20 marks) Mrs. Linda Quek is well known for her skills as a baker. She started baking cakes and cookies as a hobby in 1990, and her skills improved through the years. In the early days, she gave what she baked to her extended families and friends during festivities. Her cakes and cookies were so good that people started to ask for them outside the festivity periods. Soon she had to enlarge her kitchen and put in more ovens to cope for the demands from her families and friends. In 1998, she started selling her cakes and cookies on an ad hoc basis and her business grew considerably in 1999. On January 1, 2000, with the encouragement from her husband who gave her $45,000 as capital for her business, she decided to see if she could turn what she had been doing into a profitable business. She started by putting her bills and receipts in a money box so that she could determine whether her business would be profitable and if she could run it as a full time business. At the end of the year 2000, Mrs. Quek had hoped for a pile of cash for her effort during the year. Although she did not start her enterprise purely for money, she had worked very hard and expected to have surplus cash in her safe. She wanted to take this cash and rent a place so that she can sell her cakes and cookies in a “nice little shop” that she had always wanted to own. She also wanted to buy a bigger delivery truck so as to deliver her products to “every corner in Singapore” so that every one could savor her wonderful cakes and cookies. However, as she counted her cash at the end of the year, she became painfully aware that there wasn’t as much as she had hoped for. When compared to a job offer she received from a top hotel in Singapore to be the chief chef in the cake and pastries section, she was far behind. She started questioning herself. What had happened? Where had all the money gone to? Should she give up her hope to start her business? In her search for the answers, she contacted you, her nephew/niece, and one who had eaten many of her cakes and cookies, to ask you for advice. In going through her records of her cash inflows and outflows, you established the following:

Mrs. Quek Cake Business Cash flows for the year ended 31 Dec 2000

Inflows: Cash from sales $348,000 Money from her husband $ 45,000 Outflows: Raw materials (eggs, flours, butter etc.) $161,898 Wages for part-time help $ 54,300 Delivery expenses $ 72,982 Utilities $ 27,320 Other expenses $ 55,500


In addition, you obtained the following additional information: 1. Mrs. Quek purchased a small second-hand delivery truck for the delivery of her cakes and

cookies. The vehicle was purchased on 1 July 2000 at the cost of $40,000. The vehicle is expected to last till 31 Dec 2005. The scrap value for the vehicle is estimated to be $7,000. The $40,000 was included under delivery expenses.

2. Mrs. Quek spent $42,000 at the beginning of January 2000 to extend her kitchen and to install two additional ovens. Mrs. Quek paid $25,000 for the ovens and she expects both the kitchen and ovens to last for 5 years. Mrs. Quek had included the amount of $42,000 spent under the “other expenses” category.

3. In January 2001, Mrs. Quek received her PUB bill which showed her December 2000 utility expenses to be $2,880.

Required: A. Based on the information given above (and make any necessary

assumptions on accounting policies), prepare the following financial statements (for the 2000 financial year) for Mrs. Quek: 1. A properly classified balance sheet 2. A properly classified profit and loss statement

(8 marks) (8 marks)

B. Briefly describe any 4 (four) characteristics of a company incorporated under the Company Act.

(4 marks)

Question 2 (20 marks) You are a partner of a business consultancy firm. One of the up and coming chains of restaurants in Singapore, Beef & Co. comes to you to seek advice. Below are their financial statements and its related notes.

Beef & Co. Pte Ltd Balance Sheet as at 31 December 2000

Assets Notes 2000 1999Cash 784,164 443,451 Trade Receivables 5,716 9,548 Other Receivables and prepayments 138,364 124,845 Inventories, at cost 40,588 23,546 Fixed Assets 2 545,460 401,566 1,514,292 1,002,956

Liabilities and Equity Trade Payables 339,126 381,141 Income Tax Payable 150,000 90,000 Issued Capital 3 400,000 400,000 Share Premium 200,000 200,000 Accumulated profits (losses) 425,166 (68,185) 1,514,292 1,002,956


Beef & Co. Pte Ltd Profit and Loss Statement for the year ended 31 December 2000

Notes 2000 1999Revenue 4,512,875 2,125,789 Cost of Sales (1,205,789) (548,158) Gross Profit 3,307,086 1,577,631 Administrative Expenses 4 (2,663,735) (1,158,456) Profit before Tax 643,351 419,175 Income Tax (150,000) (90,000) 493,351 316,175

Notes to Financial Statements 1. Summary of significant Accounting Policies

Basis of accounting – The financial statements have been prepared in accordance with the historical cost convention and have been prepared in accordance with the provisions of the Singapore Companies Act and Singapore Statements of Accounting Standards. Revenue Recognition – Revenue arising from food and beverages are recognized at each month’s anticipated sales figures. Inventories – Inventories are all stated at cost, using the last-in first-out method, in line with the company’s policy to serve fresh foods to the customer. Depreciation – Depreciation is provided on the straight line basis. The annual depreciation rates are as follows: Furniture and fittings – 33 1/3% Renovation – 33 1/3% Plant and Equipment – 20%

2. Fixed Assets (All calculations are correct)

Furniture and Fittings Renovations

Plant and equipment Total

Cost: $ $ $ $At beginning 78,219 249,157 229,144 556,520Additions 80,598 202,256 137,849 420,703At ending 158,817 451,413 366,993 977,223

Acc. DepreciationAt beginning 26,073 83,052 45,829 154,954Depreciation for year 52,939 150,471 73,399 276,809At ending 79,012 233,523 119,227 431,763

Depreciation for last year 26,073 83,052 45,829 154,954

Net book valueAt the beginning 52,146 166,105 183,315 401,566At ending 79,805 217,890 247,766 545,460


3. Issued Capital 2000 1999

Authorised: $ $600,000 ordinary shares of $1 each 600,000 600,000300,000 10% preference shares of $1 each 300,000 300,000

900,000 900,000

Issued and paid up700,000 ordinary shares of $1 each 400,000 400,000

4. These charges include:

2000 1999Directors' Renumeration 465,154 134,789Depreciation Expense 276,809 154,954Bad Debts written off (no allowance provided) 1,589 10,486Lease expense for space * 750,461 345,126Salaries for staff 1,169,722 513,101

2,663,735 1,158,456 *The lease commitments are for the next 30 years are fixed at $750,461 for 8 units. These leases are non-cancellable and at the end of the 30 years the ownership is transferred to Beef & Co. The director of the company, Lee Ah Meow, felt that this set of financial statements was very well prepared and represented what accountants called a true and fair view of the company’s operations. However, as he was preparing to bring his company for expansion into Korea, he needed additional funds to finance this venture. He presented his financial statements to external users but they told him that it was full of errors. Lee Ah Meow cannot understand what went wrong. As the accountant was going to charge him high fees for redoing his books, he came to you, a start-up consultancy company for help. Required: A. Examine the financial statements and all its related notes. Highlight 5

(five) errors either in the notes, accounting policies (with reference to GAAP and SAS) or items in financial statements to Mr. Lee. Only discuss issues or items PRESENTED in this question and you can assume other materials are irrelevant to this question. For each error, identify what is wrong and state what should be done instead.

(10 marks)

B. Calculate any 3 (three) financial ratios based on the financial statements to Mr. Lee. Explain how these ratios may be interpreted and what they mean in the context of the current economy and the potential expansion into Korea.

(6 marks)

C. What is the relevance of Generally Accepted Accounting Principles (GAAP) in the preparation of financial statements?

(4 marks)


Question 3 (30 marks) Determinus Teekielarus decided to go into business. “Cappe Diem!” he proclaimed, and armed with $100,000 he begged over many years from his father, Determinus commenced his executive lifestyle business, focusing on the Personal Digital Assistants (PDA) market. He leased a property in Kayu Bakar Plaza on 1 July 1998 for 3 years (time value of money is 6%), paying $40,000 at the end of each year and proceeded to start his new life as a CEO of Value Added Lifestyles (VAL) Ltd. His inventory records show the following movements for the first month of operation: July 1: Purchased 10 units of Palm ($400 each) and 10 units of CLIE ($500 each) July 3: Sold 5 Palm units (average selling price $530 each) and 3 units of CLIE ($675) July 10: Purchased 9 units of Palm ($410 each) and 13 units of CLIE ($520 each) July 15: Purchased 14 units of Palm ($420 each) and 8 units of CLIE ($490 each) July 18: Sold 12 Palm units (average selling price $540 each) and 5 units of CLIE ($690) July 23: Sold 7 Palm units (average selling price $520 each) and 14 units of CLIE ($680) In an effort to boost sales, Determinus agreed to provide some corporate clients with a credit facility. At the end of July 1998, $23,000 was due from its customers. August was a bad month, however. Many of his debtors, such as Mr. Kernot Phey, Ms. Bo Liau, and Mr. Bean Aladin cannot be located, and Determinus believes a total of $2,300 will never be collected. As a result, he stopped offering credit to customers, and the Debtors balance for August decreased by $10,800. Despite the slow beginning and tough first few months, the business grew as the PDA market boomed. Within just 3 short years, Determinus now has the largest executive lifestyle business in South East Asia, branching into many businesses, such as spas and rejuvenation centers, executive short getaways, gymnasiums, chartered jets and others. In the financial year ended June 2001, Determinus acquired $302,309,000 new fixed assets and was able to declare and pay $23,422,000 dividends. The Balance Sheet and P&L of the company are as follows.

Value Added Lifestyles LTD Balance Sheet as at 30 June 2001 ($’000)

Assets 2001 2000 Cash $34,726 $29,282 Accounts receivable 89,099 69,099 Interest receivable 2,294 1,938 Inventory 34,029 33,111 Prepaid expenses 6,039 8,363 Long-term receivable from other companies 11,940 6,049 Fixed assets, net depreciation 573,021 391,212 Total $751,148 $539,054 Liabilities Accounts payable $98,476 $73,467 Salary and wage payable 2,394 3,019 Accrued liabilities 7,322 6,948 Long-term debt 172,039 76,500


Stockholders’ Equity Common stock 359,291 293,091 Retained earnings 111,626 86,029 Total $751,148 $539,054

Value Added Lifestyles LTD Profit and Loss Statement for the year ended 30 June 2001 ($’000)

Revenues 2001 Sales revenue $310,223 Interest revenue 2,820 Dividend revenue 5,042 Gain on sale of plant assets 8,392 Total revenues and gains $326,477 Expenses Cost of goods sold $110,286 Salary and wage expense 57,301 Depreciation expense 49,919 Other operating expense 42,820 Interest expense 10,183 Income tax expense 6,949 Total expenses $277,458 Net income $49,019 Determinus believes there is no end to the possibility! In an ambitious move, on 1 July 2001, he issued 5-years bonds totaling $100,000,000 to buy a fleet of Gulfstream private jets. The stated interest rate for the bonds is 8% (interest compounded and payable yearly) and the market rate is 6%. With such ambitious plans, no one knows what the future holds for Determinus. His empire, of course, may collapse anytime due to the high level of borrowings. Determinus feel quietly confident, as he relaxes in his private small little island, drinking bubble tea and watching the sunset.

Financial Tables PV factor PVA factor FV factor FVA factor 3 periods, 6% 0.8396 2.6730 1.1910 3.1836 5 periods, 6% 0.7473 4.2124 1.3382 5.6371 6 periods, 3% 0.8375 5.4172 1.1941 6.4684 10 periods, 3% 0.7441 8.5302 1.3439 11.4639

Required: A. What would be the journal entries on 1 July 1998 and 31 July 1998 for the

lease property if it were an operating lease? What would the entries be if it were a capital lease?

(4 marks)

B. If periodic inventory system is used, what is VAL’s ending inventory for Palm on 31 July 1998 under weighted average inventory method? If perpetual inventory system is used, what is the COGS of the CLIE under LIFO method for the month of July 1998? (6 marks)


C. On advice from his accountant, Mr. Numero Logy, Determinus decided that he would make a 5% allowance for bad debt (based on outstanding accounts receivable). What is the journal entry to provide for this allowance for July1998? What is the journal entry to write off the uncollectible amount in August 1998?

(5 marks)

D. What is the journal entry to record the bond issue on 1 July 2001? Assuming effective rate of interest rate amortization for bond issues, what would be the journal entry to record the amortization of the bond on June 30, 2002.

(5 marks)

E. Prepare the operating section of the Cash Flow Statement for the year ended 30 June 2001. You can use either direct or indirect method. OPTIONAL: Prepare a complete Cash Flow Statement including the cash reconciliation for an additional 5 bonus marks. Only attempt this optional part after you have completed all other questions in this examination.

(10 marks)

(5 bonusmarks)

End of Part A (70 marks)


PART B (15 Multiple-Choice Questions, 30 marks) 1. Jurassic Bones uses the periodic inventory system. The inventory account balances at the

beginning and end of the year were $58,000 and $45,000 respectively. Selling, administration and finance expenses totaled $13,000 during the year and Sales Revenue for the year amounted to $327,000. Jurassic Bones made a gross profit of $53,000. What is the amount of net purchases made during the year? A. $261,000 B. $287,000 C. $305,000 D. $310,000 E. $314,000

2. The direct write-off method of accounting for bad debts:

A. Is subject to a significant amount of estimation error B. Have a direct impact on the allowance for bad debts account C. Requires that bad debts be provided in the period in which sales are made D. Results in a better matching of costs with revenues than the allowance method E. Fails to match bad debt losses with sales for the same period

3. Which of the following statements is true?

A. Cash discounts are discounts given to customers so that they will purchase more B. Sales Return and Allowance account is an expense item because it shows the

expenditure associated with the provision of quality products/services to customers C. Net sales revenue is sales revenue less the discounts received for early payments D. Expense should be recognized when the benefits have been completely consumed

and an obligation to pay exists E. Under the allowance method, the bad debt expense account represents the portion of

current period’s sales that are uncollectible 4. The following data are a summary of selected transactions that occurred during the

financial year ended June 2000 for Celestial Travel: (a) Tour Fees receipts of $92,000 were collected during the year. However, $21,000 of this amount was still in the form of customer deposits as at 30 June 2000, (b) Cash payments of $45,000 were made for expenses during the year. $6,000 of this amount has not been consumed during the year. Expenses owing but not yet paid amount to $4,000, and (c) Depreciation expense for office equipment was $3,200. What is the accrual profit of Celestial Travel for the year? A. $20,800 B. $24,000 C. $24,800 D. $47,000 E. None of the above


5. The following will occur if an adjusting entry to record accrued wages is NOT made: A. Both expenses and liabilities will be understated B. Both expenses and liabilities will be overstated C. Expenses will be understated, but liabilities will be overstated D. Expenses will be overstated, but liabilities will be understated E. It depends on how the original transaction is recorded

6. Why do companies include more than one year of balance sheet, profit and loss

statement, and cash-flow statement in annual reports? A. Companies do so to show that they are voluntarily disclosing more information than

necessary for the benefits of statement users. B. Doing so allows management of companies to change the amounts that were

reported in previous year’s statements, where necessary. C. As stakeholders of companies become more informed, they would like to have a

higher degree of disclosure in annual reports so that they can make better decisions with regards to appointments of directors and auditors.

D. Doing so provides users of financial statements with a reference point for determining changes in a company’s financial position and performance.

E. To assist readers in establishing long term trends on the financial performance and position of the company.

7. After preparing its profit and loss statement for this year, the accountant of KS Trading

Pte. Ltd. discovered the following errors: The beginning inventory of the previous year was understated by $25,000 and the ending inventory for the previous year was however, overstated by $25,000. If these were the only errors, the net profit for this year will be: A. Understated by $25,000 B. Overstated by $25,000 C. Understated by $50,000 D. Overstated by $50,000 E. None of the above

8. Which of the following descriptions is incorrect?

A. The Balance Sheet provides a summary of the financial position of a company at a particular point in time, listing a company’s assets, liabilities, owners’ equity.

B. The Income Statement reports the amount of net income earned by a company over a period, including operating and non-operating revenue and expenses.

C. The Statement of Cash Flows reports the amounts collected or paid out in cash in relation to its operating, investing, and financing activities over a period.

D. The Statement of Retained Earnings details the changes in the owners’ equity from one accounting period to the next.

E. The Trial Balance is the most important element of an annual report because it lists all the accounts used by the company during the financial year.


9. The total shareholders’ equity will be smaller at the end of a financial year than its beginning balance if: A. The company has a net income lesser than dividends paid B. The company issues additional shares of stock during the period C. The company does not pay dividends D. The company issues long term bonds at a premium E. The company has a positive cash flow from operations

10. A business borrowed $1,000,000 on 1 July 2000. The terms of the loan required that the

loan be repaid by 5 equal installments of $200,000 each on 30 June each year beginning 2001. In addition, interest at the rate of 8% per annum would be charged and would be payable monthly at the end of each month. The loan amount would be shown in the balance sheet of the business as at 31 December 2001 as: A. Long-Term Loan $1,000,000 B. Long-Term Loan $800,000 C. Long-Term Loan $600,000 D. Long-Term Loan $600,000, and Loan Payable under Current Liability $200,000 E. Long-Term Loan $800,000, and Loan Payable under Current Liability $200,000

11. Lion Eyes Ltd. leased a building from JTC for a period of eight years, beginning 20X1.

It refurbished the building extensively at a cost $750,000 on 1/7/X3, with an estimated life of 5 years. What is the straight-line depreciation expense for the refurbished portion of the building for the year ended 31/12/20X4? A. $150,000 B. $93,750 C. $75,000 D. 46,875 E. None of the above

12. The primary objective of financial accounting is to:

A. Record the transactions of a business organization. B. Provide information to help in decision-making. C. Determine the value of a business organization. D. Provide business organizations with a systematic means of bookkeeping. E. Determine the taxable income of business organizations.

13. If a company does not capitalize the cost of improving the drainage system for the

purpose of alleviating the flooding of its compound, then: A. Assets will be overstated B. Assets will be understated C. Expenses will be understated D. Profit will be overstated E. None of the above


14. ABC Company recorded the following transactions related to accounts receivable and uncollectible accounts for the financial year ending 30 June 2001: On 1 July 2000, Provision for Bad Debts account had a $1,000 credit balance. In September 2000, $4,800 of account receivable was written off. In March 2001, $2,050 of accounts receivable previously written off were received by the company. If the bad debt expense for the year is $4,750, what is the ending balance of the Provision for Bad Debts account? A. $8,500 B. $4,750 C. $3,000 D. $3,100 E. $1,000

15. The transactions carried out by Scientific Singapore Inc during the year caused an

increase in the following: Accounts receivable $44,250, short-term investments $30,000, inventory $15,461 and bonds $25,000; and a decrease in the following: accounts payable $13,261, motor vehicles $15,620, prepaid expense $1,500 and notes receivable $3,630. If 10,000 $1 par value shares were issued during the year at par, and dividends of $6,850 were paid, what was the net income for the year? A. $68,872 B. $97,910 C. $40,732 D. $63,490 E. none of the above

End of Part B (30 marks)

END OF ACCT101 – Financial Accounting Term 1 2001/2002 Examination

ACCT101 2001-02 T1

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