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ACCT 5930 FINANCIAL ACCOUNTING Time Allowed: 2 Hours Reading Time: 10 minutes This examination paper has 9 pages Total Number of Questions: 6 Total Marks Available: 100 Answer ALL questions The questions are NOT of equal value All answers are to be written in the examination booklet provided Candidates are to supply their own calculators All answers must be written in ink. Except where they are expressly required, pencils may be used only for drawing, sketching or graphical work. This paper may be retained by the candidate Please see over 2 Question 1 Recording Transactions (20 marks) The following nine independent events (parts a to i) occurred between 1 January 2014 and 31 December 2014 for Umizoomi Limited. Umizoomi Limited uses only a general journal and general ledger. That is, they do not use special journals and subsidiary ledgers. Required: Prepare the journal entry (if necessary) to record the event. Financial statements are being prepared as at 31 December 2014. If you believe that no entry is necessary, clearly write “No Entry”. A blank response will be marked as incorrect. Narrations are not necessary. Note that there is nothing unusual about the events which require you to question, any more than would otherwise be the case, the definition and recognition criteria of financial statement elements. Please note that each part is not of equal value. Part a (2 marks) Umizoomi Limited received $4,000 from debtors. Part b (2 marks) $5,000 of wages relating to December 2014 has not been paid and needs to be accrued. Part c (2 marks) At a board of directors meeting on the last day of the year, the company’s president and other senior executives were awarded raises totalling $200,000 annually for 2015. Part d (2 marks) One of the cash receipts credited to sales revenue turned out to be a deposit of $500 made by a customer on an order that will be filled in October 2015. Please see over 3 Question 1 (cont.) Part e (2 marks) While completing the bank reconciliation on 31 December, Umizoomi Limited identified that cheque no. 513 for a purchase of inventory was incorrectly recorded as a cash payment of $1,912 instead of $1,219. Part f (2 marks) Depreciation of $5,000 relating to Motor Vehicle was incorrectly credited to the “Accumulated Depreciation- Building” account. Part g (2 marks) Umizoomi Limited borrowed $120,000 from the bank on 1 August 2014. The loan is due on 30 June 2016 and carries an interest rate of 10 per cent per annum. Interest and principal are payable at maturity. Part h (3 marks) Umizoomi Limited owns 30% of Smith Limited and has significant influence. Accordingly, Umizoomi Limited uses the equity method to account for its investment in Smith Limited. During the year ended 31 December 2014, Smith Limited reported an after tax profit of $50,000. On 31 December 2014, Umizoomi received a cash dividend of $3,000 which represented its share of the total dividend paid by Smith Limited of $10,000. Part i (3 marks) A machine with a cost of $30,000 and accumulated depreciation to date of $22,000 was exchanged on 31 December 2014 for a new machine with a cash price of $35,000. A trade-in allowance of $9,000 was allowed on the old machine, and a cheque was drawn to cover the difference between the trade-in and the cash price. Please see over 4 Question 2 Accounts Receivable (8 marks) On 1 January 2014, Tigger’s Honeypot Limited has a debit balance of $22,000 in Accounts Receivable and a credit balance of $ 2,500 in the Allowance for Doubtful Debts. During 2014, Tigger’s Honeypot sold goods for cash for $20,000, and on credit $60,000. On 7 July 2014, one of Tigger’s Honeypot’s customers, Mr. Poor, went bankrupt. Mr. Poor owes Tigger’s Honeypot $500 and there is no hope for recovering this amount. On 14 October, Tigger’s Honeypot collected $57,500 from outstanding accounts. Tigger’s Honeypot’s financial year ends on 31 December. Required: Part a 1. If bad debts for 2014 are estimated to be 2% of credit sales, prepare the adjusting entry on the 31 December 2014 to record bad debts expense. (2 marks) 2. Calculate the net accounts receivable after the adjusting entry. (2 marks) Part b If uncollectible accounts are estimated to be $3,000 from aging receivables, prepare the adjusting entry on the 31 December 2014 to record bad debts expense. (2 marks) Part c Briefly explain what is meant by an allowance for doubtful debts. How does this affect the valuation of accounts receivable? (2 marks) Please see over 5 Question 3 Inventory (10 marks) The following information is taken from the accounting records of Goofy’s Limited for the year ended 31 December 2014. Goofy’s Limited uses a perpetual inventory control system and first-in first-out (FIFO). Units Purchase price/unit Selling price/unit 1/1/14 Inventory 1,000 $50 10/3/14 Purchases 2,000 $51 25/6/14 Sales 800 $70 30/8/14 Purchases 800 $53 5/10/14 Sales 1,500 $75 19/10/14 Purchases 500 $54 26/11/14 Purchases 700 $56 31/12/14 Sales 1,000 $73 Required: 1. Prepare the journal entry (or entries) necessary to record the sale (on credit) on 25 June 2014. (4 marks) 2. Calculate the cost of ending inventory as at 31 December 2014. (2 marks) 3. A stocktake revealed that inventory on hand as at 31 December 2014 was 1,600 units. Prepare the journal entry (or entries) necessary to recognise the inventory shortage expense for the year of 2014. (2 marks) 4. Assume that, at the end of the year, Goofy’s Limited discovered that the net realisable value of each item is $52. Calculate and prepare the journal entry (or entries) necessary to adjust inventory records. (2 marks) Please see over 6 Question 4 Noncurrent Assets (10 marks) Part a House at Pooh Corner Limited purchased a machine on 1 July 2013 at a cost of $60,000. On 30 June 2014, it was identified that this was incorrectly debited to machine expenses. The machine is expected to have a useful life of 5 years from the date of purchase and a residual value of $10,000. The machine is to be depreciated using the reducing balance method at a rate of 30%. Required: 1. Prepare the journal entry (or entries) necessary to correct the above error as at 30 June 2014. (4 marks) 2. Over the life of the machine, what will be the total depreciation charged on the asset (assume no changes in useful life, residual value and method of depreciation over the life of the asset)? (2 marks) Part b During the audit of the accounts of Maisy Limited for the year ended 31 December 2014, it was discovered that the following errors had been made during the year. A block of land, which was purchased for $80,000 in 2006 and revalued at $90,000 during 2010, was found to have a fair value of only $65,000 at 31 December 2014. No entry has been made yet to record the fall in the value of this land. Required: Prepare the journal entry (or entries) necessary to correct the above error as at 31 December 2014. (4 marks) Please see over 7 Question 5 Financial Statement Analysis (12 marks) Kanga’s Limited is profitable. Kanga’s Limited’s financial statement relationships are as follows: Quick Ratio 1.5 times Debt to Equity Ratio 0.7 times Basic Earnings per Share $0.9 Required: For each of the following transactions or events, indicate the directional effect (increase, decrease, no change) on the Quick Ratio, Debt to Equity Ratio, and Basic Earnings per Share. Note that you must write either ‘increase’, ‘decrease’, or ‘no change’. A blank response will be marked as incorrect. a). Switched to FIFO from LIFO for inventory valuation in a period of increasing prices. b). Switched to the reducing balance depreciation method from the straight-line depreciation method for machinery acquired two years ago (i.e. this is the second year in which the depreciation is recorded). This machinery was expected to last for 5 years with no residual value. c). Sold an item of property plant and equipment with a carrying amount of $600,000 for $200,000. d). Received $10,000 as a deposit from a customer for a job to be carried out in the future. e). Made a 1:4 bonus issue out of the revaluation surplus. f). A court announced a decision on a product liability lawsuit and found that Kanga’s Limited is liable for $100,000 damages to be paid within one year. The management of Kanga’s Limited are contemplating an appeal to the decision, but the company’s legal representatives believe that Kanga’s Limited would have very little chance of winning. A contingent liability in the amount of $100,000 is currently disclosed in the financial statements. Provide your answers in a table as illustrated below. Transaction Quick Ratio Debt to Equity Ratio Basic Earnings per Share a) … … … b) c) d) e) f) Please note this question has been replicated in the online practice quiz so you can practice completing this online Please see over 8 Question 6 Cash Flow Statements (40 marks) The financial statements of Owl’s Limited are presented below; Owl’s Limited Balance Sheets as at 31 December, 2014 ('000s) 2014 2013 Current Assets Cash 105 40 Accounts Receivable 260 135 Allowance for Doubtful Debts (60) (45) Inventory 210 335 Prepaid Insurance 115 90 630 555 Non-Current Assets Land 690 530 Buildings 460 400 Accumulated Depreciation – Buildings (200) (150) Motor Vehicles 100 90 Accumulated Depreciation – Motor Vehicles (65) (55) Equipment 120 120 Accumulated Depreciation – Equipment (75) (55) 1,030 880 Total Assets 1,660 1,435 Current Liabilities Accounts Payable 150 135 Accrued Expenses 120 75 Income Tax Payable 35 50 Final Dividend Payable 40 50 345 310 Non-Current Liabilities Bank Loan 585 485 Notes Payable 35 - 620 485 Total Liabilities 965 795 NET ASSETS $695 $640 Shareholders’ Equity Share Capital 400 340 General Reserve 30 15 Revaluation Surplus 60 75 Retained Earnings 205 210 TOTAL SHAREHOLDERS' EQUITY $695 $640 Please note this question has been replicated in the online practice quiz so you can practice completing this online 9 Question 6 (cont.) Owl’s Limited Income Statement for the Year Ended 31 December 2014 ('000s) Sales 3,600 Less: Cost of Goods Sold 2,855 Gross Profit 745 Rent Revenue 20 Discount Received 5 770 Less Expenses: Bad Debts Expense 25 Discount Allowed 5 Inventory Shortage Expense 10 Depreciation Expense – Buildings 50 Depreciation Expense – Motor Vehicles 25 Depreciation Expense – Equipment 20 Loss on Sale of Motor Vehicle 5 Loss on Devaluation of Land 20 Interest Expense 40 Other Expenses 480 Total Expenses 680 Profit before Income Tax 90 Less: Income Tax Expense 35 Profit after Income Tax 55 Additional Information ? Interest on the bank loan and note payable was fully paid as at 31 December 2014 (i.e. there was no prepaid interest or accrued interest). ? The carrying amount of the motor vehicle sold was $20,000. ? Land to the value of $35,000 was purchased with the issue of a long term note. ? Land is the only class of asset measured using the revaluation model. All other non-current assets are measured at cost. ? A bonus dividend of $30,000 was paid out of the Revaluation Surplus. ? A cash dividend was paid during the year. Required: 1. Prepare a Statement of Cash Flows (using the direct method) for Owl’s Limited for the year ended 31 December 2014 in accordance with AASB107. (30 marks) 2. Prepare a note reconciling the Operating Profit after Income Tax with Net Cash Flow from Operating Activities. (10 marks)