Nanyang Technological University BU8101 - Accounting Semester 2, 2012/2013 Group Assignment - Seminar 7 (10% of total course assessment) Due

date: Monday, 18 March 2013 at 5.00pm IMPORTANT! Seminar 7 falls in the week immediately after the semester break and it is also the quiz week. There will be no physical seminar to discuss the questions in seminar 7 as the online quiz will be conducted at the respective IT labs. Group Assignment The questions in seminar 7 cover materials in lectures 1 to 7. Students are required to complete this seminar assignment on a group basis in the following format: Use Microsoft Word and insert Excel (for tables and computation) to do the assignment. Font: Times New Roman Font size: 12 Page number: include at the bottom of the page Margins: one inch on all four sides (top, bottom, left, and right) Cover page to include: Seminar group number, team number, names of members and name of team leader. To include the declaration of academic integrity as per format provided in the course document folder immediately after the cover page of the assignment. The assignment will be graded for its content and formatting. Students who do not participate in the group assignment will be awarded zero. Submission of Assignment Each group is to upload a softcopy of their group assignment, in PDF format, via the Group assignment folder in their respective seminar website on or before 5.00pm on Monday, 18 March 2013.

(Unless otherwise stated, questions are taken from WHB) Important! Although terms used in the questions may be different from those taught in the lectures as we are using a US textbook, students are expected to present their answers using the terms taught in the lectures. For example: Impairment of Accounts Receivable expense should be used instead of Uncollectible Accounts expense.

Question 1 (50 marks) The trial balance of Reliance Tours Ltd. (Reliance) after its first full-month of operations, which has been prepared following the recording of all transactions using the cash basis of accounting, is as follows: Reliance Tours Ltd. Trial Balance May 31, 2012 Cash Office Equipment Buses Notes Payable Common shares Tour revenues Salaries Expense Advertising Expense Office supplies Expense Insurance Expense Gas and Oil Expense $3,000 1,800 140,000 $62,000 70,000 32,100 9,000 800 1,200 7,200 1,100 $164,100 $164,100

Other data: 1. 2. The insurance policy has a one-year term, beginning May 1st, 2012 Tour companies, when they start operations, are granted a 3-month trial period during which they operate under a temporary license. If they are approved, they are charged their license fee of $12,000 per year, starting from their first day of operations. If they are not approved, they have to close down their operations, but have nothing to pay. Reliance received its temporary license on May 1st, 2012 and obtained approval on August 1st. The note payable, issued on May 1stfor six months, carries an interest rate of 6% per year. When booking school excursion trips, Reliance asks for a $1,000 advanced cash deposit. 10 school excursion trips, for June 2012, have been formally booked. Bus drivers are paid a total of $400 per day, and are paid on Saturday for the Sunday-to-Saturday week. May 31, 2012 was a Thursday. The Footballers, a local club football team, uses the services of Reliance to transport the team to its out-of-town games, for a cost of $1,000 per game. The Footballers are billed on the 5th of each month, for transportation services received during the previous month. The Footballers play 4 out-of-town games a month.

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To encourage Footballers to sign a 2-year contract for transportation services, Reliance painted one of its buses the colors of the Footballers. The painting job cost $4,000, has been done but not yet paid for. Imperial Oil has not yet invoiced Reliance, but operating records show that 1,000 litres of petrol has been received from Imperial Oil. Reliance has agreed to pay $2.00 per litres, and to buy at least 10,000 litres of petrol a year from Imperial Oil. Office supplies expense includes $1,200 paid for paper, business forms (invoices, etc.) and other office supplies. $350 of these supplies has been used during the month. Office equipment has a useful life of 5 years. Buses have a useful life of 10 years. A two-level tour bus has been rented for the months of June and July. The bus arrived at Reliances location on May 31st. It will cost $2,000 to rent the bus for the two months (nothing has been paid yet), and Reliance expects to earn about $6,000 in operating the bus, by offering guided tours of Singapore. Operations will start on June 1st. Mark Reliance, the owner of Reliance, received an offer to sell all of the ordinary shares of the Company for $250,000 on May 31, 2012. Mark refused the offer.

Required a. Prepare adjusting journal entries as at 31 May 2012 (if required) for each of the items above. (22 marks) b. Explain the treatment of each of the above items by making reference to the relevant applicable Generally Accepted Accounting Principles. (12 marks) c. Prepare the income statement and balance sheet for Reliance Tours Ltd as at 31 May 2012. (16 marks) Question 2 (Adapted from Financial and Managerial Accounting Principles by Powers, Needles and Crosson) (41 marks) Gerald is considering an investment in the ordinary shares of a chain of retail department stores. She has identified two retail companies, Larry Company and Richard Company, whose income statements and balance sheets are presented below. During the year, Larry Company paid a total of $100,000 in dividends. The market price per share of its shares is currently $60. In comparison, Richard Company paid a total of $228,000 in dividends, and the current market price of its shares is $76 per share. Larry had net cash flows from operations of $543,000 and net capital expenditures of $1,250,000. Richard had net cash flows from operations of $985,000 and net capital expenditures of $2,100,000. Information for the prior years is not readily available. Assume all notes payable are current liabilities and all bonds payable are long term liabilities and that there is no change in the figures in the assets section of the balance sheet during the year.

Income Statement May 31 2012 Larry $25,120,000 $12,284,000 9,645,200 1,972,000 23,901,200 1,218,800 388,000 830,800 400,000 $430,800 $4.31 Balance Sheet Assets Cash Marketable securities (at cost) Accounts Receivable (net) Inventory Prepaid expenses Property, plant and equipment (net) Intangibles and other assets Total assets Larry Richard $160,000 $384,800 $406,800 169,200 1,105,600 1,970,800 1,259,600 2,506,800 108,800 228,000 5,827,200 13,104,000 1,106,400 289,600 $9,974,400 $18,653,200 Richard $50,420,000 $29,668,000 14,216,400 4,868,000 48,752,400 1,667,600 456,000 1,211,600 600,000 $611,600 $10.19

Net sales Costs and expenses Cost of goods sold Selling expenses Administrative expenses Total costs and expenses Income from operations Interest expense Income before income taxes Income taxes expense Net income Earnings per share

Liabilities and Shareholders' Equity Accounts payable $688,000 $1,145,200 Notes payable 300,000 800,000 Income tax payable 100,400 146,800 Bonds payable 4,000,000 4,000,000 Ordinary Shares 3,219,600 8,337,200 Retained Earnings 1,666,400 4,224,000 Total liabilities and shareholders' equity $9,974,400 $18,653,200

Required Conduct a comprehensive ratio analysis for each company. Compare the results of the two companies by inserting the ratio calculations from items 1 to 4 below in a table with the following column headings: Ratio name, Larry, Richard, Companies with more favorable ratio in each case (round percentages and ratios to one decimal place). 1. Prepare a liquidity analysis by calculating for each company the (a) current ratio, (b) quick ratio, (c) receivable turnover, (d) days to collect accounts receivable, (e) inventory turnover, and (f) days to sell inventory. (18 marks) 2. Prepare a profitability analysis by calculating for each company the (a) profit margin (b) return on assets and (c) return on equity. (9 marks) 3. Prepare a long-term solvency analysis by calculating for each company the (a) debt ratio and (b) the interest coverage ratio. (6 marks) 4. Prepare an analysis of market strength by calculating for each company the (a) price/earnings (P/E) ratio and (b) dividend yield. (6 marks) 5. How could the analysis be compared if information about these companies prior years were available. (2 marks) Question 3 (29 marks) Problem 14.6A (page 670) a. (2 marks) b. (12 marks) c. (2 marks) d. (6 marks) e. (3 marks) f. (4 marks) Question 4 (15 marks) Case 14.1 (page 677) a. (7 marks) b. (4 marks) c. (4 marks)

Self-Practice Problem 5. Do Self-Test Questions 1, 3, 4 to 6 (pages 659 to 660).