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-63. Questions 3(a), 3(b) and 3(c) are based on the following Infor mati on.

As a loan analyst for National Commercial Bank, you have been presented with the following information.

Panorama Company Assets Cash Accounts receivable Inventories Totalcurrentassets Otherassets Totalassets Liabilities and Stockholders Equity Current liabilities Long-term liabilities Capital stock and retained earnings Total liabilities and stockholders equity Annual sales (all on credit) Rate of gross profit on sales Interest expense Netincome Assume that the ending account balances are representa 300 000 400 000 710 000 1 410 000 930 000 30% 40 000 95000 $ 120000 220 000 570000 910000 500000 1410000

Kalso FIesta Company $ 320000 302 000 518000 I 140000 612000 1752000

350 000 500 000 902 000 1 752 000 1 500 000 40% 60 000

135000

tive of the entire year.

Each of these companies has requested a loan of 555 000 for 6 months with no collateral offered. Since your bank has reached its quota fix loan s of this type. only one of these requests can be granted.

02l0l020CAPE 2011

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(a)

Compute the Ibllowing ratios Dr both


ti)

companies.

Current ratio Aci&tst (quick) ratio Accounts reeei\ able collection period Inventory turnover ratio Debt t total assets ratio
Debt to equity ratio

12 marksj

(ii) iii)
iv)

12 mar ksf

13 marksj
12 marks} [2 marksl

(v)
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12 marksf

(xii)
(b)

Times interest earned ratio

marks)

Prepare a report Dr the bank outlining the performance of EACH company in terms of liquidity and solvency. 16 marks) Indicate which of the tvo co.mpanics s hould receive the loan AND give ONE reason why it should. 12 marksl The lollowtng three mdependent situations relate to Montcgo Company. 0)
In August 20 [0 a worker was tnjured n an accident at one of the factories owned

(c)

(d)

by Montego Company. The accident was partially the result of the workers own neuligence. The worker has sued Montego Company for $800 000, Counsel tKie\ s m ianii3jy qo ale in t K ko K t lw ut A Ii be .Ea 0 it for the compan and that the settlement would cost the company between $250 000 to $500 000.
(ij A suit for breach of contract set. king damages of 5350 Of 0 was tiled by a supplier

against Montego Company on October 4, 2010. M.ontegos legal counsel believes that an unfavourable outcome is ppph.jiJl. A reasonahic estimate of the aw arc to the plaintiff is hetween 8100 000 aw $250 000. No amount within this range is. a better estimate of potential damages than any other amount.

s i i a Pecte C ompany. Pecte s Lawyers believe i.t is p,yqbgle that Montcgo Company t he awarded damaaes of $1 000 000.
( iu

Discuss the proper accounting treatment, including any require.d note disclosures, fOr F \CL i no ii lw t am t ml mte nenrt 90o o rdc f rr t 10 marksi Totrtl 35 marks

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CAPE Accounting Unit 1 Paper 02


Comments on Responses to Question 3 Exemplar 2 3 (a> This question required only calculations of specific ratios. The candid ate was able to do all correctly and was thus awarded full marks. This candidate understood the requirement of the question and started with a summary of the classification of the ratios into liquidity and solven cy followed by the Liquidity and Solvency analysis explaining each ratio identif ied in the summary, The candidate further made intercornpany comparison. Based on the information and answers from (a) and (b) above, the candidate was able to correctly answer this question and was thus awarde d full marks. The candidate lost 6 marks in this question, which is explained as follow s: in Part (i). the candidate scored the maximum 3 marks In Part (ii), the candidate indicated that there should be no adjustment, however, the company should adjust its accounts. The candid ate did not indicate that the probable of the award should be accrued by a charge to an estimated loss account and credit an estimated liability accoun t. Additionally, no double entries were given. Making mention of these issues would have resulted in the award of 3 marks plus the 1 mark already earned . In Part (iii), the candidate did not score any marks. It should be noted that the gain contingency is not recorded until realized. There is also no disclosure in the notes unless probability of realization is very high. The candidate scored 4 out of 10 marks.

3 (b)

3 (c)

3 (d)

Overall, this can he considered a good script.