ACCT101 2001-02 T2

7/23/2019 ACCT101 2001-02 T2

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TERM 2 2001-02 EXAMINATION

APRIL 2002

ACCT101

FINANCIAL ACCOUNTING

INSTRUCTIONS TO STUDENTS

1. This paper consists of two parts, Part A and Part B, printed on a total of 10 pages (for atotal of 100 marks, plus 5 bonus 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 6 questions (70 marks, plus 5 bonus marks). You are to answer ALLquestions and show ALL relevant calculations when appropriate.

4. Part B consists of 15 Multiple Choice Questions (30 marks). You are to write in youranswer booklet the most appropriate answer. Each correct answer is worth 2 marks anda penalty of ! marks will be applied to any incorrect answer.

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ACCT101 – Financial Accounting Term 2 2001/2

PART A (3 questions, total 70 marks)

Question 1 (15 marks)

The comparative Balance Sheets of Bon Voyage Luggage Co. at Dec 31, 2001 and 2000, areas follows:

Bon Voyage Luggage Co.Balance Sheet

2001 ($) 2000 ($)

Assets

Cash 163,400 134,600Accounts Receivable (net) 192,400 176,400Inventories 287,500 312,300Prepaid expenses 8,500 6,000Land 100,000 100,000Buildings 550,000 415,000Acc. Depn – Building (201,500) (176,000)Machinery and Equipment 275,700 295,700Acc. Depn – Machinery and Equipment (104,800) (84,600)Patents (net amortization) 37,400 40,000

$1,308,600 $1,219,400

Liabilities

Accounts payable (merchandise creditors) 131,400 146,700

Dividends payable 12,000 10,000Salaries payable 10,500 12,800Mortgage payable (due 2004) 50,000 –Bonds payable – 164,000Common stock, $1 par value 19,000 15,000Share premium 210,000 50,000Retained earnings 875,700 820,900

$1,308,600 $1,219,400

An examination of the income statement and accounting records revealed the followingadditional information applicable to 2001:

a.

The net income for 2001 was $102,800. b.

Equipment with a cost of $20,000 and accumulated depreciation of $15,000 was soldfor $8,000 during the year.

c.

Cash dividend declared $48,000.d. 4,000 shares of common stock were issued at $41 per share to retire bonds payable

Required:

A. Prepare a COMPLETE statement of cash flows for the year endedDecember 31, 2002 for Bon Voyage Luggage Company. Include cashreconciliation and any necessary schedule. You can use either the indirectmethod or the direct method.

(12

marks)

B. Is it possible for a company to record a loss and yet have a positive cashflow from operations and vice versa? Explain.

(3 marks)

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On 1 July 2001, Griffindor Corporation entered into a leasing agreement to lease a truck fromHufflepuff Company. The lease agreement specified payments of $15,000 per year (payable

each year on June 30) for 5 years. The market rate of interest for lease transactions of this typeis 6 percent compounded annually. Griffindor Corporation closes its accounts on 31December.

Financial Tables FV factor PV factor FVA factor PVA factor

5 periods, 6% 1.3382 0.7473 5.6371 4.2124

Required:

A. Assuming the lease qualifies as an operating lease, prepare the necessary journal entries for Griffindor Corp on 1 July 2001, 31 December 2001, and30 June 2002.

(3 marks)

B. Assuming the lease qualifies as a capital lease, prepare the necessary journalentries for Griffindor Corp on 1 July 2001, 31 December 2001, and 30 June2002. Ignore the depreciation of the leased asset.

(3 marks)

C. Assuming that instead of leasing the asset, Griffindor Corp decides to purchase the truck from Hufflepuff Company. In return, Griffindor Corpwould issue 10,000 shares of $1 par value to Hufflepuff Company. Theagreed value of the share at the date of the exchange was $6 each. Preparethe journal entry for the transaction.

(1!

marks)

D. What are the conditions that will decide whether a lease is an operatinglease or a capital lease?

(2!

marks)

Question 3 (8 marks + 2 bonus marks)

Hubba Hubba Ltd. was authorized to issue $500,000 of 8% per annum, four-year bonds, dated1 May 2001. All the bonds were sold on that date when the effective interest rate was 10%.Interest is payable on May 1 and November 1 each year. The company follows a policy ofamortizing any premiums or discounts using the effective interest rate method. The companycloses its books on Dec 31 of each year.

Financial Tables FV factor PV factor FVA factor PVA factor

4 periods, 8% 1.3605 0.7350 4.5061 3.31214 periods, 10% 1.4641 0.6830 4.6410 3.1699

8 periods, 4% 1.3686 0.7307 9.2142 6.7327

8 periods, 5% 1.4775 0.6768 9.5491 6.4632

A. Calculate the issuance price of the bonds. (2 marks)

B. Prepare journal entries for Hubba Hubba for the following dates:1. May 1, 20012. Nov 1, 20013. Dec 31, 2001

(6 marks)

C. BONUS QUESTION: What is the total interest expense over the life of the bonds?

(2 marks)

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A group of SMU students, including you, are keen to set up a bookshop in Singapore. Youhave named it BookTalk Pte Ltd. The company will specialize in selling books that are

published by local authors. Being the entrepreneurial students that you are, you want toexpand the business in 6 months time, believing that there is a good market for your products.Subsequently, you may either invite venture capitalist to come in at that point in time or to goto the bank to obtain a loan. Given that, situation, your friends decide that since you are a topstudent in the financial accounting class, they would like you to set the company’s accounting

policy. You are aware that the decisions you make today has an impact on the kind offinancial statements that you will present to potential investors or the bank in 5 years’ time.The following are the crucial issues that you are agonizing over.

Inventories – You know that inventories should be valued at the lower of cost and NetRealizable Value. But you are unable to decide which inventory method to use: perpetual or

periodic. In addition to that you have to decide on the cost flow system to use; weightedaverage, first-in-first-out, or last-in-first-out method. The publishing industry in Singapore has

been generally experiencing an upward swing in its sales.

Depreciation – At the current moment, the kind of assets you have and expect to have arelike shelves, office equipment and a delivery van. You expect that in the next two months youmight be able to raise enough funds to buy a shop-house along Tanjong Pajar Road to openthe bookstore. You need to decide on the depreciation policy the company will adopt for theassets. This should include the method of deprecation and associated estimates.

Sales and Accounts Receivables – Part of your business model incorporates a loyaltyscheme that would allow customers on this scheme to place their orders on the Internet andyou would deliver to them. You need to decide when to recognize such revenues as deliverymight take place over a week and such customers will be allowed to pay on credit, as theywould have established their accounts with you for a long period.

Another issue pertaining to this area is the sales and accounts receivables to other bookstores.Most of these sales to other bookstores will be on something close to a consignment sale.Your other partners wonder if there is any way they can push these sort of sales to the actualsales figures. You need to decide on the revenue recognition policy and any treatmentmethods for the accounts receivables.

Required:

Present to your partners your proposed accounting policies for inventory,depreciation and sales and accounts receivables.

Your discussion should pertain to:1. Any alternative accounting policies on that that section. You do not

need to keep to the Singapore standards alone.2. Your rationale for choosing one policy over the other.3. Impact on financial statements as a result of such policies.

As a guide, you would probably want to write at least ONE PAGE for eachsection (inventory, depreciation, sales and accounts receivable).

(5 marks

per section)

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The trial balance of Tracy Webmaster.com at 31 December 2001 before adjustments is given below.

Tracy Webmaster.comUnadjusted Trial Balance as at 31 December 2001

Cash 2,430

Accounts Receivable 44,130

Supplies 2,600

Prepaid Insurance 3,600

Equipment 48,300

Building 123,200

Acc. Depn. – Building 24,640

Land 180,000

Accounts Payable 30,000

Unearned Web-based Revenue 9,700

Note Payable, long-term 84,000

Owner’s Capital 100,000

Retained Earnings 51,900

Web-based Revenue 135,080

Wages Expense 15,650

Interest Expense 4,900

Utilities Expense 3,800

Supplies Expense 6,710

435,320 435,320

There are the following events you need to pass adjusting entries for:

a. The company had a contract with Britney Spears to have her picture pop up every timewhen someone surfs to the webpage (this is known as “impressions”). The agreementwas for $0.01 for every one time her picture pops up. As at 31 December she stillowes us money for 300,000 impressions and this has not been recorded. However, asyoung pop stars are known to be quite immature at times (she herself admitted that sheis not a girl, but not yet a woman!), the company has decided to provide an allowance

of bad debt amounting to 30% of this portion of the accounts receivable. b.

The equipment that was bought on 1 July 2001 has a technical life of 4 years. Marketexperts estimate that the equipment is only useful commercially for about 3 years. The

building has an estimated useful life of 10 years. The company has a policy to usestraight-line depreciation on all assets. The company also decided to fully insure theequipment and this is reflected in the prepaid insurance account, effective from 1 July2001 to 30 June 2004.

c. It was discovered that for the month of December you owe wages to two interns fromSMU. Their monthly wages per month is $500, subject to a 20% CPF employeecontribution and a 16% employer contribution.

d. The 5-year long-term note payable was obtained in July 1, 1999 from Al Cappuccino

(a local godfather) that incurs a 10% interest per annum payable on 31 July and 31January every year.

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Required:

A. Propose the necessary adjusting entries as at 31 December 2001 (9 marks)

B. Prepare a properly classified Income Statement (3 marks)

C. Prepare a properly classified Balance Sheet (3 marks)

Question 6 (7 marks + 3 bonus marks)

Tow Keh Leong Pte Ltd (TKL), a registered trader under the GST Act, was incorporated inSingapore operating as a manufacturer of household electrical equipment. TKL uses the

periodic inventory system to record its inventory and conducted its physical stock take on 30December 2001. The total value of the inventory arising from the physical inventory count on30 December 2001 amounted to $1,530,000. You may assume there were no movements ininventory on 31 December 2001 except as indicated below.

TKL’s net profit before tax for the year ended 2001 was $250,000 before taking into accountthe following except as otherwise indicated:

1.

The company received $51,500 cash (inclusive of GST) for an urgent order ofmerchandise from Hwang Gan Ltd, a new local customer, on 29 December to bedelivered by 31 December. The company had included this sale in computation of the

profit of $250,000 but due to unforeseen circumstances, the identified merchandisecosting $42,000 was delivered on 2 January 2002. The said merchandise was excludedfrom the year-end’s physical inventory count as it was marked “Hold for shippinginstructions.”

2.

On 31 December 2001, TKL shipped merchandise costing $20,000 to a customer onFOB shipping point terms at an invoice value of $31,000. This lot of merchandise wasincluded in the physical inventory for 2001.

3. Raw materials were received by TKL on 31 December 2001 at an invoiced value of$45,000. Related transport costs amounted to $3,000, custom duty $2,000, GST of$1,000. These costs were not taken up in the books.

Required:

A. Explain when should the TKL recognize the revenue from Hwang GanLtd? State any assumptions that you make.

(3 marks)

B. What should be the value of the inventory of TKL on 31 December 2001? (4 marks)

C. BONUS QUESTION: Taking into account the information given, re-compute the profit of TKL for the year 2001 based on generally acceptedaccounting principles.

(3 marks)

End of Part A (70 marks)

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PART B (15 Multiple-Choice Questions, 30 marks)

1. Accrual accounting techniques are used to:

A. Recognize expenses that have not been recorded in the books

B.

Record the anticipated effects of actions that may occur at a future date.

C. Report the results of actions whose monetary effects are difficult to estimate.

D. Assign revenues and expenses to the appropriate accounting period.

E. Allocate non-operating revenues and expenses to the appropriate business unit.

2. Given the following information (taken from the records of Tellers Corporation for themonth ended December 31, 2001), what is the net income?

Advertising expense $20,625 Income tax expense 13,095Accounts payable 13,450 Dividends paid 14,125

Retained earnings (Dec 1, 2001) 57,860 Consulting fees revenue 93,550Rent expense 11,728 Supplies expense 16,917

A.

$45,110

B. $35,310

C. $31,185

D.

$11,385

E. None of the above

3. Under the allowance method for accounting for uncollectible accounts:

A.

Losses from bad debts are recognized when defaults occur.B. Estimated losses from potentially uncollectible debt are amortized over the life of

the obligation.

C. Loans to high-risk borrowers are recorded at a discount relative to their stated principal amounts.

D. Losses from bad debts are estimated for the same period in which the correspondingcredit sales occur.

E. In accordance with the conservatism principle, customers who have not paid their bills over 180 days should be written off as bad debts.

4.

At 1 July 2000, the allowance for doubtful debts account of LGT Ltd was $4,600. Theaccountant of the company has calculated that the appropriate amount of allowance fordoubtful debt as at 30 June 2001 is $7,300 based on the aging method. Bad debt totaling$3,200 were written off during the year and a previously written off debt of $1,700 wererecovered. The necessary general journal entry to bring the allowance for doubtful debtsto the appropriate amount on 30 June 2001 would be:

A. DR Bad Debt Expense $3,100 CR Accounts Receivable $3,100

B.

DR Bad Debt Expense $4,200 CR Allowance for Bad Debts $4,200

C. DR Bad Debt Expense $5,900 CR Allowance for Bad Debts $5,900

D. DR Bad Debt Expense $4,200 CR Accounts Receivable $4,200

E.

None of the above

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5.

In a period of rising prices, which of the following inventory methods generally resultsin the lowest reported net income?

A. FIFO method.

B.

LIFO method.

C.

Average-cost method.D. Specific-identification method.

E.

All of the above

6. If a company’s ending inventory is understated by $3,000 and beginning inventory isoverstated by $5,000, the company’s operating income will most likely be:

A.

Overstated by $2,000.

B. Overstated by $8,000.

C. Understated by $2,000.

D. Understated by $8,000.

E.

None of the above

7. A company bought a truck on 1 January 2001 for $30,000. The truck has a five-yearestimated useful life and a $5,000 residual value, depreciated using the straight-linemethod. Assuming that there is no other purchases or disposal of fixed assets, on 31 Dec2003, the “Truck” account will show a balance of:

A. $16,000.

B.

$18,000.

C. $20,000.

D.

$21,000.

E.

$30,000.

8. If a company issued bonds at a discount, the discount is amortized over the life of the bonds and:

A. Decreases the periodic interest payment below the interest expense charged.

B. Increases the periodic interest expense charged above the interest payment made.

C.

Increases the periodic interest payment made above the interest expense charged.

D. Decreases the periodic interest expense charged below the interest payment made.

E.

None of the above

9.

Which of the following is INCORRECT in respect of the statement of cash flows?

A. It provides information about an entity’s cash receipts and payments over a periodof time

B. It provides details as to how the cash account changed during a period

C. It includes transactions that are not already reflected in the balance sheet andincome statement

D. It highlights changes in managerial strategy regarding investments and finances

E.

None of the above (i.e. all statements above are correct)

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10.

For purposes of determining the amount of a capital expenditure, the acquisition cost ofequipment would NOT include:

A. Transportation cost.

B.

Insurance cost during transit.

C.

Cost of testing equipment during installation.D. Repair cost of damage incurred during installation.

E.

All of the above are included in the acquisition cost.

11. Wallaby Inc. has two stocks: preference stock (6%, $10 par, 45,000 shares authorized,10,000 shares issued) and common stock ($7 par, 250,000 shares authorized, 120,000shares issued). Assume that there is no tax. If Wallaby pays a $64,000 dividend, and ifthe preferred stock is cumulative and two years’ dividends are in arrears, commonstockholders will receive:

A. $32,000

B.

$52,000C. $58,000

D. $46,000


12. Which one of the following errors causes net income to be overstated?

A. Failure to provide for allowance for bad debts

B.

Failure to record collection of an account receivable

C. Failure to record customer deposit’s for services to be performed next year

D.

Failure to adjust a prepaid expense previously recorded as expenses

E.

Failure to record an accrued revenue adjusting entry

13. A direct purchase of property through the issuance of shares:

A. Will be shown as an investing outflow and a financing outflow

B.

Will be shown as an investing inflow and a financing inflow

C. Will be shown as an investing outflow and a financing inflow

D. Will be shown as an investing inflow and a financing outflow

E.

Will not be shown in either the investing nor financing sections

14. Which of the following is NOT usually disclosed as a note to the accounts?

A. Revenue recognition policies

B.

Additional information about the summary totals

C. Contingent Liabilities

D. Accounts that have been highlighted as “suspicious” by the auditors

E.

None of the above, i.e. all can be disclosed as a note to the account

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15.

Rio’s inventory records in October shows that it has 200 opening inventory balance at $5each. It made 4 lots of purchases: 150 units on Oct 5 at $6 each, 250 units on Oct 10 at$5.75 each, 180 units on Oct 24 at $6.20 each and 100 units on Oct 27 at $6.10 each.Sales were as follows: 175 units on Oct 8, 225 units on Oct 15, and 300 units on Oct 28.What is the cost of goods sold for the month of Oct if periodic average cost inventory

method is employed?A.

$3,957.50

B. $4,027.84

C. $4,159.75

D. $4,163.50


End of Part B (30 marks) END OF ACCT101 – Financial Accounting Term 2 2001/2002 Examination

ACCT101 2001-02 T2

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