THE INSTITUTE OF COST AND MANAGEMENT ACCOUNTANTS OF BANGLADESH

CMA DECEMBER, 2016 EXAMINATION

FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Time: Three hours Full Marks: 100

 All questions are to be attempted.
 Show computations, where necessary.
 Answer must be brief, relevant, neat and clean.
 Start answering each question from a fresh sheet.

Q. No. 1.
Mr. J. Abedin of ABC River Resort opened the business on June 1 with eight air-conditioned
units. Its trial balance before adjustment on August 31 is as follows:

ABC RIVER RESORT

Trial Balance
31st August 2010

Taka
Cash 19,600
Supplies 3,300
Prepaid Insurance 6,000
Land 25,000
Cottages 125,000
Furniture 26,000
Accounts Payable 6,500
Unearned Rent Revenue 7,400
Mortgage Payable 80,000
J. Abedin, Capital 100,000
J. Abedin, Drawing 5,000
Rent Revenue 80,000
Repair Expenses 3,600
Salaries Expenses 51,000
Utilities Expenses 9,400
Other data:
(1) Insurance expires at the rate of Tk. 400 per month.
(2) A count on August 31 shows Tk. 600 of supplies on hand.
(3) Annual depreciation is Tk. 6,000 on cottages and Tk. 2,400 on furniture.
(4) Unearned rent revenue of Tk. 4,100 was earned prior to August 31.
(5) Salaries of Tk. 400 were unpaid at August 31.
(6) Rentals of Tk. 1,000 were due from tenants at August 31, (Use Accounts Receivable)
(7) The mortgage interest rate is 9% per year. (The mortgage was taken out on August 1)

Required:
(i) Journalize the adjusting entries on August 31 for the 3-month period June 01 – August 31.
(ii) Prepare an adjusted trial balance on August 31.
(iii) Prepare an income statement and an owner’s equity statement for the 3 months ending
August 31 and a balance sheet as of August 31.
[Marks: (10+10+10) = 30]
Q. No. 2.
On January 1, 2010. Pele Company purchased the following two machines for use in its
production process.

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CMA DECEMBER, 2016 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING
Q. No. 2. (cont’d……..)
Machine A: The cash price of this machine was Tk. 38,000. Related expenditures included:
Sales tax Tk. 1,700, shipping costs Tk. 150, insurance during shipping Tk. 80., installation and
testing costs Tk. 70, and Tk. 100 of oil and lubricants to be used with the machinery during it
first year of operations. Pele estimates that the useful life of the machine is 5 years with a Tk.
5,000 salvage value remaining at the end of that time period. Assume that the straight-line
method of depreciation is used.
Machine B: The recorded cost of this machine was Tk. 160,000. Pele estimates that the useful
life of the machine is 4 years with a Tk. 10,000 salvage value remaining at the end of that time
period.
Required:
(a) Prepare the following for Machine A.
(i) The journal entry to record its purchase on January 1, 2010.
(ii) The journal entry to record annual depreciation at December 31, 2010.
(b) Calculate the amount of depreciation expense that Pele should record for machine B
each year of its useful life under the following assumptions.
(i) Pele uses the straight-line method of depreciation.
(ii) Pele uses the declining-balance method. The rate used is twice the straight-line
rate.
(iii) Pele uses the units-of-activity method and estimates that the useful life of the
machine is 125,000 units. Actual usage is as follows: 2010, 45,000 units; 2011,
35,000 units; 2012, 25,000 units; 2013, 20,000 units.
(c) Which method used to calculate depreciation on machine B reports the highest amount
of depreciation expense in year 1 (2010)? The highest amount in year 4 (2013)? The
highest total amount over the 4-year period?
[Marks: (5+5+5) = 15]
Q. No. 3.
The following represents selected information taken from a company’s aging schedule to
estimate uncollectable accounts receivable at year end.
Particulars Number of days Outstanding
Total 0-30 31-60 61-90 91-120 Over-120
Tk. Tk. Tk. Tk. Tk. Tk.
Accounts receivable 375,000 220,000 90,000 40,000 10,000 15,000
Uncollectible % 1% 4% 5% 8% 10%
Required:
(i) Calculate the total estimated bad debts based on the above information.
(ii) Prepare the year end adjusting journal entry to record the bad debts using the aged
uncollectible accounts receivable determined in (i). Assume the current balance in the
allowance for doubtful accounts is Tk. 8,000 in addition to above calculated amount, that
has not been accounted for.
(iii) On the above account, Tk. 5,000 is determined to be specifically uncollectible. Prepare
the Journal entry to write off the uncollectable account.
(iv) The company collects Tk. 5,000 subsequently on a specific account that had previously
been determined to be uncollectable in (iii). Prepare the journal entries necessary to
restore the account and record the cash collection.
(v) Comments on how your answers to (i)-(iv) would change if the Company used 3% of total
accounts receivable, rather than aging the accounts receivable. What are the advantages
to the company of aging the accounts receivable rather than applying a percentage to
total accounts receivable?
[Marks: 15]

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CMA DECEMBER, 2016 EXAMINATION
FOUNDATION LEVEL
SUBJECT: 001. PRINCIPLES OF ACCOUNTING

Q. No. 4.
O’Reilly Company lost all of its inventory in a fire on December 26, 2010. The accounting
records showed the following gross profit data for November and December.
November Taka December (to 12/26) Taka
Net sales 600,000 700,000
Beginning inventory 32,000 36,000
Purchases 377,000 424,000
Purchase return and allowances 13,300 14,900
Purchase discounts 8,500 9,500
Freight-in 8,800 9,900
Ending inventory 36,000 -

O’Reilly is fully insured for fire losses but must prepare a report for the insurance company.
Required:
(i) Compute the gross profit rate for November.
(ii) Using the gross profit rate for November, determine the estimated cost of the inventory
lost in the fire.
[Marks: (7+8) = 15]
Q. No. 5.
(a)(1) Presented below are transactions related to Wheeler Company:

- On December 3, Wheeler Company sold Tk.500,000 of merchandise to Hashmi Co.,

terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was
Tk.350,000.

- On December 8, Hashmi Co. was granted an allowance of Tk. 27,000 for merchandise
purchased on December 3 from Wheeler Company.

- On December 13, Wheeler Company received the balance due from Hashmi Co.

Prepare the journal entries to record these transactions on the books of Wheeler
Company using a perpetual inventory system.
(2) Assume that Wheeler Company received the balance due from Hashmi Co. on January
2 of the following year instead of December 13. Prepare the journal entry to record the
receipt of payment on January 2.

(b) Distinguish between:

(i) Capital and Revenue expenditure;
(ii) Accrual and Cash basis of Accounting;
(iii) Single step and Multiple step form of Income Statement;
(iv) Preferred Stock and Common Stock;
(v) Depreciation, Amortization & Depletion.
[Marks: (10+15) = 25]

= THE END =

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