a Arab Open University Faculty of Business Studies B291 - MTA - 2’ Semester 2013-2014 Time Allowed: 2 Hours Instructions: 1- Read each question carefully and make sure that you understand it before you begin to answer i. 2+ This exam consists of TWO Compulsory Questions; each question carries 50% of the marks. 3- Programmable and financial calculators are not permitted or to share, or pass them between each other in an examination. Also, you are not permitted to use calculators with word processing capabilities. 4- In questions that require calculations, credit will be given for showing your workings. 5- Take about 10 minutes to look through all the questions on the exam and do the ones you are ‘most comfortable with first. a "The objective of general purpose financial reporting forms the foundation of the Conceptual Framework. Other aspects of the Conceptual Framework flow logically from the objective." Required: 1- Explain the objective of financial statements. 2- Explain the underlying assumptions on which financial statements should be prepared. 3+ Briefly explain the following qualitative characteristies of accounting information: 3.1. Relevance 3.2. Reliability 4. The IASB Framework lists a number of different measurement bases which are employed in different degrees and in varying combinations in financial statements. Discuss these bases. [Marks: (4+ 12 + 14+ 20) =50] [Question ‘a- Here are some transactions in respect of a new business started by Diana on April 1, 2014: Date Transaction 1 Diana started up a business as a sole trader by introducing $200,000 into the business bank account. 2. Diana purchased a delivery van for $15,000, paid in cash. 9 Diana paid rent for a shop, $3,200 in cash. 12 Diana purchased goods for resale costing $35,000 on eredit from Wafaa (invoice no. WA.444). 16 Diana sold goods for $16,000 in cash. 25. Diana sold goods for $30,000 on credit to Ahmed (invoice no. AH.500) 28 Diana paid $33,600, taking advantage of a 4% settlement discount with respect to invoice no. WA.444, 29 Ahmed paid $28,200, taking advantage of @ 6% settlement discount with respect to invoice no. AH.S00.Required: 1- Enter the above transactions into their appropriate cash books. 2- Prepare the appropriate T cash at bank account. [Marks: (16 + 4) = 20] b+ Banana Anna Children’s Toys manufactures solid wood and porcelain toys. On January | 2012, the company purchased new machine for $50,000 in cash. The company will depreciate the equipment over a 4-year period with an estimated salvage value of $10,000. The net income before depreciation and taxes in the first year was $200,000. The company’s tax rate is 30%. Required: 1- Prepare a four-year depreciation schedule for the machinery under: 1.1. Straight-line method. 1.2. Reducing-balance method. 2. Explain which of the two methods would result in the lowest income tax expense for the first year and which of the two methods would result in the highest net income for the frst year. Show your calculations. 3+ Under the reducing-balance method, prepare the adjusting entry for depreciation at December 31, 2013. Post the adjustments to T accounts, and indicate the balance sheet presentation of the machine at December 31, 2013. Note: ‘The depreciation rate under reducing-balance method = "YResidual Value + Cost of Asset Where: 1 = the economic useful life [Marks: (14 + 6 + 10) = 30] End of Exam Good Luck!