Quiz 1 2018, answers PDF

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Quiz 1 Feedback 2018...

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Topic 1 – Non-current assets

Question 1 Which of the following is included in the cost of constructing a building?

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

Insurance costs during construction

18(39.14%)

11

5

2

0

The purchase of the delivery truck used to deliver construction materials

15(32.61%)

4

10

1

0

Cost of repairing vandalism damage during construction

3(6.53%)

1

2

0

0

Cost of removing the demolished building existing on the land when it was purchased

10(21.74%)

5

4

1

0

Answer Insurance policies are necessary when undertaking civil works, as a consequence, such an expenditure is included in the overall cost of a building construction. The other costs mentioned would all be recorded as separate assets.

1

Question 2 Which of the following is an investing activity?

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

Payment of dividends

2(2.11%)

0

1

1

0

Purchase of inventory for cash

8(8.43%)

5

3

0

0

Purchase of equipment for cash

41(43.16%)

27

10

4

0

Purchase of company shares

43(45.27%)

13

26

4

0

Legend The purchase of equipment or any other fixed asset is classified as an investing activity. Whereas the purchase of inventory is classified as an operating activity because it is part of the firm´s commercial activities (buying and selling goods). The payment of dividends is a financing activity as it is a return on the funds invested in the firm. So is the share buy-back, which reduces the company´s equity.

2

Question 3 Capitalising an expenditure rather than recording it as an expense:

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

Impacts the amount of total comprehensive income reported during an accounting period, but has no effect on the total carrying amount of noncurrent assets on the statement of financial position

7(23.34%)

3

3

1

0

Impacts the total carrying amount of non-current assets on the statement of financial position, but has no effect on the amount of total comprehensive income reported during the accounting period

7(23.34%)

4

1

1

1

Impacts the total carrying amount of non-current assets reported on the statement of financial position and the amount of total comprehensive income reported during a period

14(46.67%)

9

5

0

0

Has no impact on the carrying amount of non-current assets on the statement of financial position or the amount of income reported on the statement of comprehensive income

1(3.34%)

0

0

1

0

3

Answer: Capitalising an expenditure means recording something as an asset, rather than an expense. The effect of capitalizing expenditure versus booking it as an expense is twofold: non-current assets increase, and comprehensive income is higher because there is no expense.

Question 4 The accounting life of intangible assets is determined by

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

their legal lives

9(8.66%)

5

2

2

0

their useful lives

40(38.47%)

13

17

8

2

their legal lives or useful lives, whichever is shorter

52(50.0%)

33

18

1

0

the tax life mandated by the ATO

2(1.93%)

2

0

0

0

Answer: Intangible assets are special assets generated mostly from contractual agreements, which means they do not have a physical form and all related risks and benefits are inherent to the initial contractual arrangement (i.e. patents, copyrights etc). Hence, its accounting life is based on either their legal lives or their inherent useful lives, whatever is shorter.

4

Question 5 Matt purchased equipment at the beginning of July 2015 for $21,100. Matt decided to depreciate the equipment over an eight year period using the straightline method. Matt estimated the equipment's residual value at $1,500. The estimated fair market value at the end of June 2016 was $20 000. Which of the following statements is correct concerning Matt's financial statements at 30 June 2017?

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

The carrying amount is $16,200

23(53.49%)

21

1

1

0

The carrying amount is $18,650

15(34.89%)

8

6

1

0

The carrying amount is $17,000

0(0.0%)

0

0

0

0

The equipment will be reported on the statement of financial position at its fair market value of $20,000

5(11.63%)

3

1

1

0

Answer: As per the Statement of Financial Position, the carrying amount of a given fixed asset is equal to its historical cost deducted by the accumulated depreciation. So the first step is to compute the depreciation expense for this period, which in turn is used to calculate the carrying amount as follows below. After one year, the depreciation recorded for this equipment is $2,450 [(21,1001,500)/8]. So is the accumulated depreciation for the first period. Therefore, the carrying amount for this equipment is $18,650 (21,100-2,450). After year two (30th June 2017), the depreciation expense is 2,450, which takes accumulated depreciation up to 4,900. Therefore the carrying amount is 21,100 4,900 = 16,200 5

Topic 2 – Partnerships

Question 1 Smith, Brown and Easton (S, B & E) are partners with capital balances of $5 000, $4 000 and $2 000 respectively and S, B &E share profits 50 per cent, 25 per cent and 25 per cent respectively. The partners have decided to liquidate the partnership and sell the non-cash assets for a $10 000 loss. After the loss is allocated, the capital account of Easton is $500 Debit. Easton is bankrupt and has left the country and will not be making up the shortfall. This capital deficiency will result the capital accounts of the partners to be (to the nearest dollar):

Answers debit Easton $500; credit S $250; credit B $250

Total

Top 2nd 3rd Bottom 25% 25% 25% 25%

12(15.39%) 4

5

3

0

debit Smith $250; debit Brown $250; credit Easton $500 18(23.08%) 4

11

3

0

debit Smith $333; debit Brown $167; credit Easton $500 37(47.44%) 16

21

0

0

debit Smith $278; debit Brown $222; credit Easton $500 11(14.11%) 10

1

0

0

Answer: Easton’s shortfall is to be shared between Smith and Brown according to their capital balances prior to the liquidation as follows: Smith: $5,000 Brown: $4,000 Total (S&B) $9,000 Easton´s deficiency allocation: $500 (Credit) Smith’s contribution: (5,000/9,000)*500 = $277.78 => $278 (Debit). Brown’s contribution: (4,000/9,000)*500 = $222.22 => $222 (Debit).

6

Question 2 Due to some unexpected issues, Brown needs to take some money out of the partnership with Jane. When a partner takes money out of the partnership, the partner's:

Answers

Total

Top 2nd 3rd Bottom 25% 25% 25% 25%

Capital account is credited, decreasing the total Equity 14(26.93%) 1

9

3

1

Drawings account is debited

14(26.93%) 12

2

0

0

Cash provision is credited, decreasing Total Equity

20(38.47%) 10

6

4

0

Shareholder equity is debited

4(7.7%)

2

0

0

2

Answer: In case a partner withdraws some money from the partnership, his/her drawings account balance increases to reflect the reduction of funds. There is no shareholder equity account in a partnership as each partner has his/her own capital account. Furthermore, there is no cash provision account in a partnership.

7

Question 3

If a partner has a debit balance in their capital account and is personally unable to contribute, the other partners:

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

sue the insolvent partner balance or partner's spouse

1(1.97%)

0

1

0

0

absorb the deficiency based on their capital balances prior to the liquidation

19(37.26%)

12

5

2

0

absorb the deficiency based on their profit-and-loss sharing ratio prior to liquidation

29(56.87%)

12

13

3

1

absorb the deficiency based on their personal wealth prior to liquidation

2(3.93%)

0

1

1

0

Answer: As in a partnership the liabilities are commonly shared between the partners, in case one partner is unable to cover his/her share of a given loss, it is up to the other partners to further contribute in order to absorb such a deficiency.

8

Question 4 In a personal transaction, an existing partner receives $50,000 in cash from a new partner. The existing partner gives the new partner a 10% ownership of the partnership. To record the value of cash the existing partner received, the business should record the following journal entry:

Answers

Total

Top 25%

2nd 25%

3rd 25%

Bottom 25%

No journal entry is required for a private cash transaction.

22(46.81%)

19

2

1

0

Dr Cash 50,000

10(21.28%)

3

5

2

0

Dr Capital - New Partner 50,000 Cr Cash 50,000

2(4.26%)

1

1

0

0

Dr Existing Partner Capital 50,000

13(27.66%)

6

6

1

0

Cr Capital - New Partner 50,000

Cr New Partner Capital 50,000

Answer: As there is no new investment into the partnership, the cash paid to the existing partner does not require a journal entry due to its private purpose. Hence, this transaction refers to a sale of a partnership stake between two individuals without any financial impact in the partnership as a whole.

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