$1.19 THE UNIVERSITY OF THE SOUTH PACIFIC UNIVERSITY EXTENSION UNIVERSITY EXTENSION EXAMINATION PAPER SEMESTER 1/1999 COURSE TITLE: ario1 _ 'ntfoduction to Accounting and Financial Management DURATION OF EXAM: 3 hours and 10 minutes reading time TOTAL NUMBER OF PAGES: 40 MARK VALUE: 400 NUMBER OF SECTIONS: Two NUMBER OF QUESTIONS: Twenty NUMBER OF QUESTIONS TO BE ANSWERED. All questions are to be answered NOTES TO CANDIDATES: Silent non-programmable calculators allowed but not provided Answer multiple choice questions on the answer sheet provided Attach the multiple choice answer sheet and the worksheet (if you have used it) to your answer Booklet Show all workings to Section BAFIO1 Section A Multiple Choice Questions (15 marks) Circle the best answer on the answer sheet provided Il Which of the following statements relating to bad debts is not true? A B. c. Debiors has been declared bankrupt by the banks The creditor may turn the receivable over to a collection agency It is desirable that bad debts expense be deducted in the same accounting period in which the credit sales were recognised There is no general rule for determining the time at which a receivable actually becomes bad A bad debt may arise from misjudgment of a customers ability to pay by credit department personnel 2. Which of the following assumptions or principles is most closely related to the use of the provision method of accounting for bad debts? PoOR> Objectivity Going concem Cost Accounting entity Matching, 3, ‘Which of the following statements relating to inventory valuation is true? A B. no The average cost method is called the weighted average method when using a Perpetual system The average cost method is called the moving average method when using a periodic system The allocation of total inventory cost between inventory and cost of goods sold must be based on some flow assumption when a perpetual inventory system is being used, but not when a periodic system is in use The cost flow assumption must conform to the actual physical movement of goods Alllof the above are trueAFI01 4 If inventory costs are declining, net profit is most likely to be highest if the inventory method used is A. The perpetual system with any flow assumption B. FIFO Cc LIFO D. Weighted Average E, The periodic system with any flow assumption 5, If the ending inventory is overstated A. Net profit for the period will be understated B. _Net profit for the period will be overstated Cc Assets will be understated D. Liabilities will be overstated E. There will be no effect on the balance sheet 6. Merchandise inventory should normally be recorded on the financial statements as: A. Acurrent asset B. — Aninvestment C. Plant, property and equipment D. — Anexpense E. — Anon-current asset 7. Which of the following best describes the proper classification and normal balance of the Discount Allowed account? A Asset; debit B. Expense; debit C. Revenue; credit D. Liability, er E. Owner's equity; credit 8. When a partner invests net assets in a partnership busin. That partner’s capital account is debited That partner’s current account is credited That partner’s capital account is credited That partner’s current account is debited ‘That partner’s asset account is debited MoIOw>AFIO1 10. i 12 13. Which one of the following items should not be capitalised as part of the cost of a purchased machine? A. Sales tax B. Cost of repairing damage to machine incurred while unloading it C. Installation cost D. Cost of materials used while testing and adjusting the machine prior to commencement of normal operation E. Freight to factory Accountants record depr Allocate cost as an expense Record the annual decline in the value of assets Measure the fair market value of plant assets Conservatively reflect the effects of a recession Provide funds for replacement Which of the under mentioned will not affect the amount of depreciation charged in a particular accounting period? (Assume tax rates do not influence rates selected for profit determination). moomD> A. Life of the asset B. Cash balance available for replacement of the asset C. Historical cost of the asset D. Method of depreciation employed E. Residual value of the asset Which of the following statements relating to revaluation increments is not true? ‘A. Any existing accumulated depreciation account must be written off against the asset account B. The asset account should be increased to the amount of the revaluation C. The revaluation increment is regarded as a gain to be added to the firm's net profit for the year D. Future depreciation charges will be based on the revalued carrying amount E. None of the above, ic. all statements are true Which of the following is an intangible asset? ‘A. Plant and equipment no longer used in operations B, Obsolete inventory not written off ©. Bank balance D. — Goodwill E, None of the above(AFIO1 14, Which of the following from the viewpoint of a business is an investing activity? sale of plant, property and equipment borrowing depreciation an issue of shares drawings 15. Before the partnership’s net income (profit) from its operation is divided (distributed) between the partners in the proportions agreed on, many partnership agreement, provide that allowance first be made for a) b) °) d) °) SECTION B Question 16 interest on loans from individual partners interest on loans (advances) to individual partners salaries to one or more partners a&b ab&c PROBLEMS (20 marks) The following information relates to the business of R.Ram who is concerned about the Profitability and financial structure of his business at 30 September 19X8 and 19X9, especially since the bank is requiring repayment of the business overdraft 30 September 19X8__30 September 19X9 Sales (Credit) $40 000 $60 000 Cost of sales 26.000 42.000 All other expenses 8000 14.000 Cask at Bank 8.000 (12 000) Inventory 12.000 22.000 Accounts Receivable (net) 8000 20 000 Non- Current Assets (net) 16 000 32.000 Creditors 4.000 6 000 R. Ram Capital 40.000 48.000 Non-current Liabilities _ 8.000 Inventory on Ist October 19X7 was $110 000AFIO1 Required: A. Calculate the following ratios for 19X8 and 19X9 1 profit margin 2. rate of return on owners capital 3. current ratio 4. quick ratio 5. equity ratio (14 marks ) B. Write a report to the owner in relation to the profitability and financial stability of the business, (6 marks) (your answer should not exceed 150 words] Question 17 (25 marks) Tina and Nina operated a Real Estate Agency in partnership. The profits were shared equally. On 30 June 19X0, they decided to form a company that will takeover all the assets and liabilities of the partnership except for cash. Accounts payable is to be paid by the partners. In retum Tina and Nina each would receive 27500 shares valued at $1. The Partnership balance sheet as at 30 June 19XO was as follows Tina and Nina Real Estate Agency Balance sheet As at 30" June 19X0 Current Assets Current Liabilities Cash at bank 5.000 Accounts Payable 3 700 Accounts receivable 7 500 Inventory 4700 17200 Non Current Assets Non Current Liabilities Land and Buildings 30.000 ‘Term Loan 8.000 Delivery Van 8300 Furniture and Fittings 6200 44500 Owners Equity Tina — Capital 25.000 — Nina - Capital 25.000 $61 700 $61 700AFIO1 On 10 July T & N Real Estate was established with registered capital of 200 000 shares, with nominal value of $1 and took over all the assets and liabilities of the partnership. The assets and liabilities were transferred as per conditions of takeover and the assets were recorded in the books of the company at the following fair values. Accounts Receivable $6 500 Inventory 4.200 Land & Buildings 38.000 Delivery Van 7.000 Furniture and fittings 6 000 After the company was formed the following happened. Prospectus were issued on 15" of July inviting public to subscribe for 60 000 shares with followings terms: 50 cents per share payable on application 50 cents per share on allotment = 20July Tina and Nina each received 30 000 shares in the company. - 31 August application money was received for 50000 shares - 15 September 50000 shares were alloted = 30 September all allotment money was received. ired: a) Prepare realization account for the partnership. b) Record all necessary general journal entries in the books of the T & N Real Estate LimitedAFION Question 18 (15 marks) S Goundar balance sheets for the year ended 30 June 19X6 and 30 June 19X7 follow: S$ Goundar Comparative Balance Sheets _—_ __ 30/6/19X6 30/6/X7__ Cash at bank $10 000 $15.000 Debtors 6 000 13.000 Inventory 20.000 19 000 Plant 300 000 350 000 Accumulated depreciation - plant (100 000) (120 000) Furniture 20.000 10.000 Accumulated depreciation — Furniture __(6 000) (4.000) $250,000 $283.00 Creditors 40 000 60 000 S Goundar —capital 210 000 223 000 $250 000 $283 000 The profit and loss statement is shown below. S Goundar Profit and Loss Statement For the year ended 30 June 19X7 Sales Revenue $146 000 Cost of goods sold 60.000 Gross Profit 86 000 Proceeds from sale of furniture 5.000 91.000 Expenses: Selling and distribution expense 30.000 Carrying amount of furniture sold 4.000 Depreciation of plant 20.000 Depreciation of furniture 4.000 58.000 Operating profit $33,000 Additional Information Goundar withdrew $20 000 for private use during the year ended 30 June 19X7.Furniture which had cost $10,000 and had been written down to $4 000 was sold for $5000 cash . No Furniture was purchased during the year.Required : Prepare a statement of cash flows for the year ended 30 June 19X7 [worksheet is provided if required] Question 19 (13 marks) On I July 19X2 XYZ Limited acquired plant at a cost of $110 000. It was estimated that the usefill life of the plant would be 5 years. The company uses the straight line method depreciation and its balance date is 31 December. On I July 19X4 the company revalued the equipment upwards by $18 000 based on an independent valuer’s report to fair value, which was considered to be less than recoverable amount. There was no need to revise useful lives or residual amounts. On 30 of June 19X6 the plant was sold for $40 000 cash. Required Prepare journal entries (in general journal form) to record: The acquisition of the plant The depreciation expenses charged at the end of year 19X2 and 19X3 Revaluation of the plant Disposal of the plant. pegs Question 20 (12 marks) A) Ryan Company uses the allowance method of handling credit losses. It estimates losses at 1% of credit sales which were $400 000 during the current year. On 31 December of the current year , the Accounts Receivable balance was $80 000, and Allowance for Doubtfill Debts had a credit balance of $600 before adjustment Required i) Give the adjusting entry to record credit losses for the current year ii) Show how Accounts Receivables and the allowance for Doubtful Debts would appear in the 31 December balance sheet.ae B) When Santa Ram arrived at his store on the morning of 20 February, he found empty shelves and display racks. Thieves had broken in during the night and stole most of the shops inventory. The company accounts for the period to date showed the following Net sales $130 000 Net Purchases 84300 Inventory at the beginning of the period 76.000 The gross profit during the past several years had consistently averaged 30%of sales. Ram wishes to file an insurance claim for the theft loss. the accounts staff did a stock take of what ever was left and found that inventory worth of 25 500 at cost was untouched. Required i) ii) Estimate the cost of his inventory at the time of thef. Determine the value of the inventory stolen. (Show all workings) The EndAFION SELECTED RATIO FORMULAE All or some of these formula: may be useful. Operating profit before tax + interest expense Operat Average total assets Current assets Current liabilities Total liabilities Total assets COGS, Average inventory balance Operating expense Net sales revenue Net sales revenue Average total assets Average receivable * 365 Net sales revenue ing profit after income tax ‘Net sales revenue Cash at bank + Marketable securities + net receivable Current liabilities Net sales revenue Average payable balance Average payable * 365, ‘Net sales revenue ‘Net sales revenue ‘Average total assets Average receivable balance Total assets Total equityAF101 STUDENT NAME: STUDENT ID.NO. MULTIPLE CHOICE ANSWER SHEET ie A B Cc D CE 2. A B Cc D E 3. A B Cc D&E 4. A B Cc D CE 5. A B Cc D CE 6. A B Cc D E 7. A B Cc D E 8. A B Cc D £E 9. Ave) c Dee: 1. A B C D £E 11. A B c D CE 12. A B Cc D CE 13. A B.C D E 14, A B Cc D £E 15, A B c ese,Cash Flow Statement Worksheet Name 19X6 19X7 Difference Non Cash Cash Flow lor Dr [cr Dr ler br [cr Jor cr [or ler [Cash at bank 410000) 15000] Debtors 6009] 13000) inventory 20000 18000 Plant 300000 350000] [Accumulated depreciation - plant 100000 120000] Fumiture 20000] 10000 |Accumulated depreciation —Fumiture | _ 6000} 4009] (Creditors 40000 60 000 [S Goundar capital 210000 223 000 [Sales Revenue 146000] Cost of goods sold 160000] Proceeds from sale of fumiture 5000] [Expenses [Selling and distribution expense 30000] [Carrying amount of furniture sold 4000} 20000 4000] It you have used this work sheet attach this sheet fo your answer booklet