ACCT101

TERM 1 2003-04 EXAMINATION NOVEMBER 2003

ACCT101 – Financial Accounting

INSTRUCTIONS TO STUDENTS 1 The time allowed for this examination paper is 3 hours. 2 This paper consists of two parts, Part A and Part B, printed on a total of 8 pages (for a

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

3 Part A consists of 4 questions (70 marks). You are to answer ALL questions and show

ALL relevant calculations when appropriate. 4 Part B consists of 15 Multiple Choice Questions (30 marks). Please write your

answers to Part B on the FIRST page of your answer booklet. Each correct answer is worth 2 marks and a penalty of ½ marks will be applied to any incorrect answer.

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ACCT101

PART A (4 questions, total 70 marks) Question 1 (5 + 4 + 6 + 6 + 4 = 25 marks) MISO Pte Ltd is a company that produces lifestyle products such as massage chairs, air purifiers, etc. After years of researching, MISO’s R&D department has perfected a neck massager, Strangler. On April 1, 20X2, MISO signed a non-cancelable agreement and commissioned an engineering company to produce special equipment for the production of Strangler. The machine costs MISO $1,000,000 and was delivered (and paid in cash!) on August 1, 20X2. In addition, the installation procedures and additional insurance for the transportation and installation cost MISO an additional $10,000. This equipment is expected to last 8 years with $100,000 residual value and in accordance with company policies, the depreciation method used is Double Declining Balance. In order to finance this new product, MISO has the choice of obtaining funds from shareholders or from bonds. After much deliberation, the board of directors decided to issue bonds. 1,000 10-year bonds with a par value of $1,000 and coupon rate of 6% were issued at a price of $864,097 on July 1, 20X2. At the time of issuance the market rate was 8%. To make the bonds attractive to investors, MISO promises to pay half-yearly payments on January 1 and July 1 every year, with the first payment due in January 1, 20X3. Towards the end of 20X2, a customer suffered severe injury while using Strangler. Fortunately, the customer survived. The customer’s hospital bill amounted to $30,000 and she continued to incur acupuncture and physiotherapy expenses after being released from the hospital. She is suing MISO for $50,000 medical expenses, $200,000 for loss of partial income (she has to take time-off work twice a week for treatment), plus an additional $100,000 for emotional damages. MISO’s legal counsels have advised that the chance of the customer winning the case and being awarded the full damages is 1 in 100, on the basis that she has used Strangler excessively, without heeding the warnings on the product’s box and instructions leaflets. However, as a presiding judge may be sympathetic to her plight, it is very probable that she will be awarded the medical and MISO will bear the total legal costs (estimated to be $300,000).

InterestPeriods 10 20 10 20 10 20 10 20

FV 1.3439 1.8061 1.4802 2.1911 1.7908 3.2071 2.1589 4.661PV 0.7441 0.5537 0.6756 0.4564 0.5584 0.3118 0.4632 0.2145FVA 11.4639 26.8704 12.0061 29.7781 13.1808 36.7856 14.4866 45.762PVA 8.5302 14.8775 8.1109 13.5903 7.3601 11.4699 6.7101 9.8181

3% 4% 6% 8%

Required: a. Prepare the necessary journal entries for (1) the commissioning of the equipment (2)

delivery of the equipment and (3) the depreciation journal entry for the financial year ended 31 December 20X2.

b. Explain how the choice of depreciation method will impact MISO’s bottom line. Illustrate your arguments with examples.

c. Outline the advantages and disadvantages of raising funds from (1) debt providers and (2) shareholders.

d. Prepare the necessary journal entry for the issuance of the bonds on July 1, 20X2 and the required adjusting entry on December 31, 20X2.

e. Discuss the appropriate accounting treatment for the lawsuit.

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ACCT101

Question 2 (10 + 5 = 15 marks) When COBC announced that Robinsons is up for sale, your very very very rich uncle, Oei Heong Long gave you a call and asked if you would help him evaluate the financial position and performance of Robinsons within fifteen minutes. You explained to him that proper financial analysis can not be done in a rush but your uncle was worried that he will miss out on a bargain if you take too long. “Just punch up some of those accounting ratios for me and tell me what they mean! Quick!”, he said.

Balance Sheet

as at 30 June 2002 Income Statement

for the year ended 30 June 2002

Required: a. Calculate the following ratios for the latest financial year and interpret the ratios for

your uncle: (1) Current Ratio (2) Debtor’s Turnover (A/R turnover) (3) Gross Profit Margin (4) Asset Turnover and (5) Times Interest Earned. Remember you will need to explain the ratio, not just saying how the ratio is calculated.

b. After explaining the five ratios above to your uncle, explain to him the limitations of

financial statement analysis AND suggest ways on how you can improve your analysis of Robinson, if you are given additional time to do a more thorough and meaningful analysis.

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ACCT101

Question 3 (6 + 5 + 4 = 15 marks) a. The extracts of GoAmigo Ltd’s Annual Report shows that it has issued new shares and

bought back some shares during the year.

Statement of Changes in Equity extract: Share Premium Reserve (2001 = $93,190,000 and 2002 = $107,738,000). The

difference is solely attributed to the issuance of new shares. Note 3: Share Capital Movements during the year were: 2002 Opening Balance 369,644,000 Cancellation of 1,191,000 ordinary shares of $1 each (1,191,000) Issue of 1,244,000 ordinary shares of $1 each 1,244,000 Closing balance 369,697,000 Note 4: Share buy back Under the share buy back scheme mandated by shareholders, the company

purchased 1,191,000 ordinary shares of $1 each at an average price of $17.94 per share, amounting to a total cost, including brokerage, of $21,360,000. The repurchase transactions were financed by internally generated funds. The amounts were adjusted against the company’s share capital and retained profits accounts.

Required: Propose the aggregate journal entries for the two transactions.

b. In the process of completing bank reconciliation, the account clerk of Barbossa Ltd

noted that the bank statement balance was $21,212 but the ledger account shows a balance of $12,121. Required: Provide five possible reasons/items why the two figures do not tally and how you would go about reconciling these reasons/items (eg: X is added to bank statement balance, Y is deducted from ledger balance).

c. Suppose KarFur Store ended May 20X4 with 800,000 units of merchandise that costs

an average of $7 each. KarFur uses the periodic inventory system. Suppose the store then sold 600,000 units of merchandise for $4.9 million during June 20X4. Further, assume that the store made two large purchases during June: 100,000 units @ $6 on June 6 and 400,000 units @ $5 on June 21.

Required: At June 30, the store manager needs to know the store’s gross profit under both FIFO and LIFO. Provide this information.

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ACCT101

Question 4 (3 + 12 = 15 marks) The comparative Balance Sheet of Northern Bell Company at March 31, 20X9 reported the following:

20X9 20X8Cash and cash equivalents 19,900$ 4,000$ Accounts receivable 14,900$ 21,700$ Inventories 63,200$ 60,600$ Prepaid expenses 1,900$ 1,700$ Accounts payable 30,300$ 27,600$ Accrued liabilities 10,700$ 11,100$ Income tax payable 8,000$ 4,700$

March 31

Northern Bell’s transactions during the year ended March 31, 20X9, included the following:

• Acquisition of land by issuing note payable ............................$76,000 • Amortisation expense...................................................................2,000 • Payment of cash dividends.........................................................30,000 • Cash acquisition of equipment...................................................78,700 • Issuance of long-term note payable (to borrow cash)................50,000 • Sale of long-term investments ...................................................13,700 • Depreciation expense .................................................................15,300 • Cash acquisition of building ......................................................47,000 • Net income.................................................................................70,000 • Issuance of common stock for cash ..........................................11,000 • Stock Dividends .........................................................................18,000

Required: a. Explain the concept of cash equivalents and provide examples of what would be normally

included as cash equivalent. b. Prepare the 20X9 Cash Flow Statement for Northern Bell, including cash reconciliation

and any other relevant disclosures.

End of Part A (70 marks)

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ACCT101

PART B (15 Multiple-Choice Questions, 30 marks) 1. The primary purpose of accounting standards is to help

A. Investors in identifying good and safe investments B. Accountants in preparing reliable and understandable financial reports C. Management in weeding out incompetent accountants D. Auditors in detecting large scale management fraud E. All of the above

2. Which of the following pairs of journal entry cannot occur?

A. Increase in assets; increase in revenue B. Increase in expense; decrease in assets C. Increase in expense; decrease in equity D. Decrease in assets; decrease in liabilities E. Decrease in assets; decrease in equity

3. Tom paid his creditor $10,000. The amount was wrongly recorded as a debit to Expense

$10,000 and a credit to Cash $10,000. The adjusting entry to correct this error is: A. A debit to Account Payable $10,000 and a credit to Expense $10,000 B. A debit to Account Payable $10,000 and a credit to Cash $10,000 C. A debit to Cash $10,000 and a credit to Expense $10,000 D. A debit to Expense $10,000 and a credit to Account Payable $10,000 E. None of the above

4. Treating a revenue expenditure as a capital expenditure:

A. Understates expenses and overstates owner’s equity B. Understates expenses and understates assets C. Overstates expenses and understates net income D. Overstates assets and understates owner’s equity E. Overstates assets and overstates revenue

5. The assets and liabilities of Orange Limited are as shown below:

Assets Liabilities As at January 1, 20X2 $100,000 $40,000 As at December 31, 20X2 $140,000 $30,000 Assuming shareholders contributed an additional capital of $20,000 in January 2002 and the company paid a dividend of $10,000 in December 2002, what was the net income of the company for the year 2002? A. $70,000 Profit B. $60,000 Profit C. $50,000 Profit D. $40,000 Profit E. None of the above

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ACCT101

6. What is the effect on a company’s balance sheet equation when an amortization expense is recognized? A. There will be no change in the total assets, liabilities and owner’s equity B. This transaction affects only the income statement, so no change on the balance

sheet will occur C. Total asset will increase and total profit will decrease by the same amount D. Without knowing the exact dollar amount of amortization, the effect on the balance

sheet cannot be determined E. None of the above

7. Which of the following is not an objective of internal control?

A. Measures to safeguard assets B. Measures to promote operational efficiency C. Measures to detect and prevent frauds D. Measures to ensure accurate and reliable accounts records E. None of the above (i.e. all of the above are objectives of internal control)

8. Under the allowance method for estimating uncollectible accounts, the entry to write off

an account: A. reduces total assets B. increases total assets C. reduces net income D. increases net income E. has no effect on total assets

9. Mitchell & Frank Incorporated uses the percentage-of-sales method to estimate

uncollectibles. Net credit sales for the current year amount to $1,000,000 and management estimates 3% will be uncollectible. Allowance for Doubtful Accounts prior to adjustment has a debit balance of $1,900. The amount of expense reported on the income statement will be: A. $31,900 B. $30,000 C. $28,100 D. $1,900 E. None of the above

10. An error in the ending inventory for the year ended 31 December 2002:

A. affects only the 2002 financial statements B. has no effect on the 2002 financial statements but will create an error in the 2003

financial statements C. automatically creates errors in the ending inventory balance in 2002 and 2003 D. automatically creates errors in cost of goods in 2002 and 2003 E. none of the above

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ACCT101

11. Maxim Limited used accrual accounting. For the year ended 31 Dec 2002, the company reported $35,000 in salary expense on its Income Statement. The comparative Balance Sheets stated that salary payable as at 31 Dec 2001 was $1,000 and $2,500 as at 31 Dec 2002. How much did the company pay for salary during the year 2002? A. $31,500 B. $33,500 C. $35,000 D. $36,500 E. $38,500

12. Recoding depreciation of long-term assets at each accounting period is an attempt to:

A. match the cost of a plant asset with the revenue it generates B. record the annual decline in the value of assets C. measure the fair market value of plant asset D. match the expected loss of productive life as the years pass E. None of the above

13. The depreciation expense on a particular machine was $5,000 for the 3rd year and

$10,500 in the 4th year. The most logical explanation for this is: A. Heavy repair costs were incurred in year 4 B. The company decided to de-accelerate its depreciation method C. Units of production method of depreciation was used D. The estimated useful life was increased in year 4 E. A balancing charge of depreciation on the last year of asset’s live (DDB method)

14. The liability on bonds issued at a discount is calculated by:

A. subtracting “unamortized discount” from “bonds payable” B. subtracting the sum of “amortized discount” from “bonds payable” C. subtracting “interest expense” from “bonds payable” D. subtracting “amount paid for stated interest” from “bonds payable” E. No calculation is needed, the liability will be equal to the bond’s face value

15. Under the effective-interest method of amortizing bond premium, the interest expense

for each interest payment period: A. is equal to the carrying value of the bond multiplied by the effective rate of interest B. is equal to the carrying value of the bond multiplied by the stated rate of interest C. is equal to the face value of the bond multiplied by the stated rate of interest D. is equal to the face value of the bond multiplied by the effective rate of interest E. None of the above

End of Part B (30 marks)

END OF ACCT101 – Financial Accounting Term 1 2003/2004 Examination

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