Exam 2013, Questions and answers - S2 PDF

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ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 1 ACCOUNTS RECEIVABLES (10 marks) •

• • •

On 1 st January 2013, SSS Ltd. has a debit balance of $30,000 in Accounts Receivable and a credit balance of $ 4,500 in the Allowance for Doubtful Debts. On 1st July, 2013, one of SSS’s customers, BBB, went bankrupt. BBB owes SSS $2,500 and there is no hope for recovering this amount. On 1 st October 2013, SSS collected $85,000 from outstanding accounts. SSS Ltd’s financial year ends on 31st December. During the year to 31 December 2013, SSS sold goods for cash for $22,000, and on credit for $80,000.

Required: Part A (i) If bad debts expense for 2013 is recognised based on 2% of credit sales, prepare the entry to record bad debts expense. (3 marks) Debit Credit Bad debts expense [2%*$80,000] Allowance for doubtful debts

$1,600 1,600

3 marks: 1 mark for each account name, 1 mark for amount

(ii) Calculate the net accounts receivable after recognising the bad debts expense. (3 marks)

Accounts receivable: $30,000+$80,000-$85,000-$2,500=$22,500 (1 mark) Allowance for doubtful debts: $4,500+$1,600-$2,500=$3,600 (1 mark) Net accounts receivable= $22,500-$3,600=$18,900 (1 mark) Net A/R

=

A/R

-

ADD

=

22,500

-

3,600

=

18,900 Accounts Receivable

1-Jan-13

o/b

30,000

1-Oct-13

Cash

Sales

80,000

1-Jul-13

ADD

31-Dec-13 110,000 1-Jan-14

o/b

c/b

85,000 2,500 22,500 110,000

22,500

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Allowance for Doubtful Debts 1-Jul-13 31-Dec-13

A/R

2,500

1-Jan-13

c/b

3,600

31-Dec-13

o/b

4,500

BDE

1,600

6,100

6,100 1-Jan-14

o/b

3600

Part B (i) Assume bad debts expense is determined as an adjusting entry at year end. If uncollectible accounts are estimated to be $3,200 from aging receivables, prepare the adjusting entry on the 31 st December to record bad debts expense (i.e., ignore your answer to Part A, 3 marks). Debit Bad debts expense [$4,500 - 2,500+X=3,200] Allowance for doubtful debts

Credit

$1,200 $1,200

3 marks: 1 mark for each account name, 1 mark for amount

(ii) Calculate the net accounts receivable after the adjusting entry. (1 mark) Accounts receivable: $30,000+$80,000-$85,000-$2,500=$22,500 Allowance for doubtful debts: $3,200 Net accounts receivable= $22,500-$3,200=$19,300 1 mark if they get $19,300 Allowance for Doubtful Debts 1-Jul-13 31-Dec-13

A/R

2,500

1-Jan-13

c/b

3,200

31-Dec-13

o/b BDE

5,700

4,500 1,200 5,700

1-Jan-14

2

o/b

3,200

ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 2 Inventory (8 Marks) The following information is taken from the accounting records of Eden Ltd for the year ended 31 December 2010.

Jan 1 Mar 10 Jun 25 Aug 30 Oct 5

Inventory Purchases Sales Purchases Sales

Units 2,000 2,200 1,800 1,800 2,500

Nov 26 Dec 31

Purchases Sales

3,000 2,000

Purchase price/unit $56 $55

Selling price/unit

$60 $52 $65 $50 $63

Assume Eden uses the first-in-first-out method of allocating cost to inventories. Determine the cost of ending inventory as at 31 December 2010 and the cost of goods sold and gross profit for the year ended 31 December 2010, assuming perpetual Inventory System. Show all working.

COGS =1,800*56+(200*56+2,200*55+100*52)+(1,700*52+300*50)= 341,600 Ending inventory=2,700*50 = $135,000 Gross profit Sales=1,800*60+2,500*65+2,000*63=396,500 COGS=341,600 Gross profit=54,900 2 marks for COGS and ending inventory each 1 mark for sales 1 mark for calculating gross profit (no penalties for carry-on errors)

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ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 3 Financial Statement Analysis (8 marks) BPS Ltd, a supplier of telecommunications equipment, retails its products through suburban outlets. Shown below are the calculations of some of its key financial ratios for 2011 and 2012. 2012 2011 Return on Equity 13% 12% Return on Assets 8% 9% Profit margin 20% 18% Asset turnover 0.40 0.50 Days in inventory 72 days 55 days Days in debtors 42 days 42 days Current ratio 1.6 1.5 Quick ratio 0.7 1.1 Debt-to-Equity ratio 1.4 1.0 Return on Equity

Operating Profit after Tax Shareholders' Equity

Return on Assets

Earnings Before Interest and Tax Total Assets

Financial Leverage

Total Assets Total Shareholders’ Equity

Profit Margin

Operating Profit after Tax Sales

Asset Turnover

Sales Total Assets

Days in Inventory

Average Inventory x 365 COGS

Days in Debtors

Average Trade Debtors x 365 Credit Sales

Current Ratio

Current Assets Current Liabilities

Quick Ratio

Current Assets - Inventory Current Liabilities Total Liabilities Total Shareholders' Equity

Debt to Equity Ratio

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Required Analyse BPS’s profitability, asset management, liquidity and financial structure for 2012 using the ratio information shown above.

Profitability ROE has increased from 12 per cent to 13 per cent while the return on assets has fallen from 9 per cent to 8 per cent. Given that ROA = Profit Margin × Asset Turnover (e.g. 20 x 0.4 per cent = 8 per cent for 2012), the fall in ROA is due to the fall in asset turnover. While the profit margin has increased from 18 per cent to 20 per cent, asset turnover has decreased from 0.50 to 0.40, thus overall ROA has decreased. [2 marks fully correct; 1 mark partially correct] Asset management: The average time to collect debtors has stayed constant. However, the days in inventory has increased from 55 days to 72 days, meaning that, on average, it is taking much longer to sell inventory. These extra days need to be financed by the company. The reasons for the build up in inventory should be investigated (e.g. stocking up for some large orders, as opposed to lack of demand, for the product, require very different actions). [2 marks fully correct; 1 mark partially correct] Liquidity: The current ratio has increased (mainly due to the build up in inventory, see above) while the quick ratio has dropped below 1 to 0.7 indicating the company may have problems paying their bills in the short term. [2 mark fully correct; 1 mark partially correct] Financial structure: Debt-to-equity ratio has increased substantially from 1 to 1.4. The ability of the company to pay its interest bill needs to be considered, particularly given the decrease in profitability as indicated by the lower ROA. [2 marks fully correct; 1 mark partially correct]

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ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 4 ADJUSTING ENTRIES AND FINANCIAL STATEMENTS (22 Marks) The following pre-adjusted trial balance has been prepared for Sydney Company as at 30 June 2010 (for the 12 months beginning on 1 July 2009): DR Cash at Bank

CR 10,000

Accounts Receivable

200,000

Allowance for Doubtful Debts

1,000

Inventory

100,000

Prepaid Rent

10,000

Property, Plant and Equipment

450,000

Accumulated Depreciation - PPE

200,000

Accounts Payable

60,000

Bank loan

50,000

Contributed Capital

310,000

Retained Profit at 1 July 2009

34,000

Sales

450,000

Cost of Goods Sold

265,000

Interest Expense

5,000

Wages Expenses

80,000

Rent Expense

5,000 1,115,000

1,115,000

The following information is given which may give rise to year end adjustments: • Depreciation on Property, Plant and Equipment is provided for on a straight line basis at 10% per annum, and it is assumed that it will have no salvage value. • The balance in Prepaid Rent relates to the 12 month period from 1 January 2010 to 31 December 2010. • An ageing analysis shows that $4,000 of Accounts Receivable is estimated to be uncollectible. • On 30 June 2010, the directors declared a dividend of $5,000, which the shareholders authorised. The dividend is to be paid on 15 September 2010.

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ACCT1501 Practice Exam Questions & Solutions

2013S2

• It is discovered that $10,000 cash received during the year and credited to sales are actually related to services to be delivered in July 2010. • $5,000 of wages relating to June 2010 have not been paid and need to be accrued. Part A (12 Marks) Prepare journal entries for the necessary end of period adjustments. Debit Depreciation Expense – PPE Accumulated Depreciation – PPE (1 mark for each entry)

45 000

Rent Expense Prepaid Rent (1 mark for each entry)

5 000

Bad Debts Expense Allowance for doubtful debts (1 mark for each entry)

3 000

Retained Profits Dividend Payable (1 mark for each entry)

5 000

Sales

10,000

Credit

45 000

5 000

3 000

5 000

Unearned revenue (1 mark for each entry)

10,000 5,000

Wages Expense Wages Payable (1 mark for each entry)

5,000

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Part B (6 Marks) Prepare an Income Statement for the year ended 30 June 2010: Sydney Company Income Statement for year ended 30 June 2010 Sales (1 mark) Less COGS ( 1 mark if COGS is in correct place) Gross Profit Less Operating Expenses Interest expense Depreciation expense (1 mark) Rent expense (1 mark) Bad debts expense (1 mark) Wages expense (1 mark)

440 000 265 000 175 000 5 000 45 000 10 000 3 000 85 000

Net Profit

148 000 $27 000

Part C (4 Marks) In the Balance Sheet as at 30 June 2010, what would be the closing balance of retained profits? Show all workings.

Opening Balance Plus Net Profit for Period Less Dividends declared Closing Balance

34 000 (1 mark) 27 000 (1 mark) 5 000 (1 mark) $56 000 (1 mark)

(1 mark for each item & correct figure )

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ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 5 (8 Marks) Non-current Assets A car was purchased on 1 January 2009 for $50,000. The car was depreciated using straight-line depreciation with an estimated useful life of four years and expected residual value of $10,000. 1. Calculate depreciation for the first year that the company holds the car, and provide the journal entry. What is the carrying value of the car on January 1, 2010? (4 marks) Straight Line Depreciation = (Cost – Residual) / Useful Life Cost = 50,000 Residual = 10 000 Useful Life = 4 years Depreciation Expense per year = (50 000 – 10 000) / 4 = 10 000 (1 mark) Dec 31 2009 Dr Depreciation expense -car 10 000 Cr Accumulated depreciation – car 10 000 1 mark for each correct line (2 marks total) Carrying value of the car on Jan 1 2010 = 50,000 -10,000 = 40,000 (1 mark) 2. On 31 December 2013 the car was sold for $8,000. Determine the profit or loss on disposal, and show the relevant accounting journal entries to account for the disposal. (4 marks)

Sold after 4 years. Since we are depreciating the car on a straight-line basis over 4 years, the book value at the end of the fourth year will be the residual value. Accumulated depreciation on the car at 31 Dec 2013 = 40,000 (50k – 10k) (1 mark) Loss on sale = Sale price – Carrying value = 8,000 – 10,000 = -2,000 (1 mark. Do not penalize for carry-on errors) Journal Entry to record the sale: Dr Cash at bank 8 000 Dr Accumulated Depreciation – Car 40 000 Dr Loss on sale 2000 Cr Car 50 000 (2 marks = 0.5 for each part of the journal entry)

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ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 6 Financial Reporting Principles, Accounting Standards and Auditing, & Sustainability Reporting (5 marks) Provide short answers to the following:

1. What is difference between ‘recognition’ and ‘disclosure’? (2 marks)

Disclosure refers to the principle of providing sufficient (disclosed) information in accounting reports to enable users to make necessary decisions: disclosed information appears in the notes to the financial statements (1 mark) Recognition: information appears on the face of the balance sheet (1 mark).

2. What is the role of directors in governing a corporation? How are they appointed, and why? (3 marks) Directors act as the ‘go between’ the company’s shareholders and managers. 1 mark They are appointed by shareholders in order to protect shareholders’ interests. 1 mark The board (comprising directors) will oversee the company’s operations which include reviewing and approving financial statements. Directors ‘sign’ off financial statements and therefore are legally responsible for the statements. 1 mark

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Question 7 Management Accounting and Cost Concepts (10 marks) The following cost data relates to TTT Ltd for the year ending 30 June 2013. Direct material used in production Advertising expenses Depreciation on factory building Direct labour: wages Cost of finished goods inventory on hand, 30 June 2013 Indirect labour: wages Factory supervisor’s salary Cash on hand, 30 June 2013 Indirect labour: overtime wages Bonus paid to factory supervisor Cost of goods sold Work-In-Progress, 30 June 2012 Work-In-Progress, 30 June 2013 Administrative costs Rental of office space for sales personnel Sales commissions Billboard advertising costs

$550,000 $60,000 $57,500 $290,000 $325,000 $70,000 $22,500 $500,000 $15,000 $4,500 $675,000 $175,000 $325,000 $75,000 $7,500 $2,500 $5,000

Required: 1. What is the total prime cost for the year ending 2013? (1 mark) Total prime costs: (1 mark) Direct material $550,000 Direct labour: Wages $290,000 Total prime costs $840,000

1 or 0

2. What is the total manufacturing overhead cost for the year ending 2013? (2 marks)

Total manufacturing overhead: (2 marks) Depreciation on factory building $57,500 Indirect labour: wages $70,000 Factory supervisor’s salary $22,500 Indirect labour: overtime wages $15,000 Bonus paid to factory supervisor $4,500

Total manufacturing overhead

$169,500

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2 or 0

ACCT1501 Practice Exam Questions & Solutions

2013S2

3. Complete the following Work-In-Process T account. Clearly label each item. (5 marks)

o/b Direct materials Direct labour Overhead

Work-In-Process 175,000 550,000 Finished goods 290,000 169,500

c/b

325,000

859,500

1 mark

for labelling o/b and c/b correctly (figures must be correct)

1 mark 1 mark 1 mark

for labelling DM correctly (figure must be correct) for labelling DL correctly for labelling overhead (from part 2) (overhead items may also be entered separately)

1 mark

for finished goods (on the credit side and label only)

Deduct 1 mark each for any incorrect accounts (or until the mark reaches 0). 4. What is the total period cost for the year ending 30 June 2013? (2 marks)

Total period costs: (2 marks)

2 or 0

Advertising expense $60,000 Administrative costs $75,000 Rental of office space for sales personnel Sales commissions $2,500 Billboard advertising costs $5,000 Total period costs $150,000

$7,500

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Question 8 CVP analysis (10 marks) Softy Ltd specialises in toys for young children. It is going to produce a new cuddly toy bear called “Boftlie”. Boftlies will be sold for $30. Softy will have to buy a new industrial sewing machine costing $40,000 in order to manufacture the Boftlie. The machine will be fully depreciated in the first year. Other fixed costs of producing and marketing the Boftlie will be $500,000. The material and labour costs for each Boftlie come to $6. In addition, sales personnel will receive 20% commission on every Boftlie sold. Part A How many Boftlies must Softy sell to: 1. Break-even? (4 marks) Price = 30 Variable cost = 6 (materials and labour) + (30 x 0.2) = $12 (1 mark) Contribution margin = P- VC = $18 (1 mark) Fixed costs = 500,000 + 40,000 = 540,000 (1 mark) BEP = 540 000 /18 = 30 000 units (1 mark) mark)

2. Earn a target operating profit of $150,000 assuming no taxes? (1 mark) Units = (540,000 + 150,000) / 18 = 38334 units (1 mark for correct answer, or zero). Students need to round up.

3. Earn a target after-tax operating profit of $150,000 assuming the company has a 25% tax rate? (2 marks) 150,000 AT = X (1 – 0.25) X = 150,000/0.75 = 200,000 before tax profit 1 mark (200,000 + 540 000)/18 = 41112 1 mark, students must round up

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ACCT1501 Practice Exam Questions & Solutions

2013S2

Part B Softy is considering buying a more expensive sewing machine, which costs $70,000 (instead of the $40,000 one). The machine will be fully depreciated in the first year. The new machine will cut labour and material costs down to $5 per Boftlie. All other variables will remain the same, i.e., other fixed costs are still $500,000, the price is still $30, and commission is still 20% Calculate the break-even under this scenario. (2 marks).

New Variable cost = 5 + 6 = 11 (1/2 mark) New CM = 30-11 = 19 (1/2 mark) New Fixed cost = 500 000 + 70 000 = 570 000 (1/2 mark) New BEP = 570 000 /19 = 30 000 (1/2 mark)

Part C Do you think Softy should buy the cheaper or more expensive sewing machine? Explain your answer. (1 mark) The break-even is identical. Students can go either way, but they need to explain their answer to get the mark. One answer is that they should go with the cheaper machine because less risk with a lower fixed cost component. Another answer is go with the more expensive machine, because less exposure to changes in labour and material prices.

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ACCT1501 Practice Exam Questions & Solutions

MCQ practice questions You have seen samples of MCQ in the lectures and in your quiz attempts.

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2013S2

ACCT1501 Practice Exam Questions & Solutions

2013S2

QUESTION 1 ACCOUNTS RECEIVABLES (10 marks) •

• • •

On 1 st January 2013, SSS Ltd. has a debit balance of $30,000 in Accounts Receivable and a credit balance of $ 4,500 in the Allowance for Doubtful Debts. On 1st July, 2013, one of SSS’s customers, BBB, went bankrupt. BBB owes SSS $2,500 and there is no hope for recovering this amount. On 1 st October 2013, SSS collected $85,000 from o...