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2012 Financial Accounting Final Exam Solution

Question one: A-Following is the trial balance for Sudan Corporation as of December 31/2011 the company uses periodic inventory system. A physical count of inventory on 31 December resulted in an inventory in amount of 100,000$ Prepare income statement and retained earnings statement Assuming the only changed in retained earnings during the current year were from net income and dividends Income statement Income Statement For the year ended December 31 2012 Sales 958500 17500 less sales returns and allowance less sales discounts 10500 net sales cost of goods sold 79000 Inventory January 2012 Purchases 500000 8000 Less purchase discounts net purchases 492000 16000 Add freight in Cost of goods purhased 508000 587000 Cost of goods available for sale Inventory december 2012 100000 487000 Cost of goods sold Gross profit Operating expenses selling expenses 212000 114000 administrative expenses Income from operations Other revenues and gains Rent Revenue 14000 10000 dividend income Interest revenue 9000 24500 Gains on sale of land Other Expenses and losses 2000 loss due to write off of inventories loss due to flood 8000 13000 loss on sale of investments Income before tax and interest Interest expense Taxable Income Income tax expense Net Income

930500

443500

326000 117500

57500

23000 152000 12500 139500 68000 71500

MBA Khartoum University2012 Financial Accounting Final Exam Solution

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Or if we consider the Flood as extraordinary item Income Statement For the year ended December 31 2012 Sales less sales returns and allowance less sales discounts net sales cost of goods sold Inventory January 2012 Purchases Less purchase discounts net purchases Add freight in Cost of goods purhased Cost of goods available for sale Inventory december 2012 Cost of goods sold Gross profit Operating expenses selling expenses administerative expenses Income from operations Other revenues and gains Rent Revenue dividend income Interest revenue Gains on sale of land Other Expensec and losses loss due to write off of inventories loss on sale of investments Income before tax and interest Interest expense Taxable Income Income tax expense Income Before irregular items Extraordinary Items loss due to flood Net income 958500 17500 10500 930500 79000 500000 8000 492000 16000 508000 587000 100000 487000 443500 212000 114000 326000 117500 14000 10000 9000 24500 2000 13000

57500

15000 160000 12500 147500 68000 79500 8000 71500

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Statement of Retained Earnings For the year ended December 31 2012 Retained Earning January 2012 Add Net Income Less Dividends Retained Earnings december 2012 240000 71500 311500 70000 241500

B-On March 1, 2012, Kassal Company acquired real estate, on which it planned to construct a small office building, by paying $90,000 in cash. An old warehouse on the property was demolished at a cost of $8,200; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,500 attorneys fee for work concerning the land purchase, $5,000 real estate brokers fee, $9,100 architects fee, and $14,000 to put in driveways and a parking lot. Required: Determine the amount to be reported as the cost of land

All necessary costs incurred in making land ready for its intended use and it is not a depreciable cost:

Cash price of property Demolishment of warehouse Proceeds from sales of salvage material Net removal cost of warehouse Attorneys fee Real estate broker fee Cost of land

90000 8200 1700 6500 1500 9100 110500

(All other cost should b e included in land improvements and not cost of land since only land improvements is depreciable

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Question Two Part one Units Cost 5 6 7

Date 1-Jun 12-Jun 23-Jun 30-Jun

Explanation Inventory Purchase Purchase Inventory

Units 225 375 500 180

Total Cost 1125 2250 3500

A Compute cost of goods sold and cost of ending inventory using FIFO, LIFO, Average cost Number of units sold= beginning inventory+ purchases-ending inventory (225+375+500)-(180)= 920 units FIFO unit cost 5 6 7 7 1125 2250 2240 5615 1260 4355

Beginning inventory Purchases 12-Jun 23-Jun cost of goods available for sale ending inventory cost of goods sold LIFO

units 225 375 320 180

beginig inventory Purchases 12-Jun 23-Jun cost of goods available for sale ending inventory cost of goods sold

units 45 375 500 180

unit cost 5 6 7 5 225 2250 3500 5975 900 5075

Average Cost Average cost= Total Cost/number of unts Average cost=6875/1100 =6.25

MBA Khartoum University2012 Financial Accounting Final Exam Solution

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beginig inventory Purchases 12-Jun 23-Jun cost of goods available for sale ending inventory cost of goods sold

225 375 320 180

6.25 6.25 6.25 6.25

1406.25 2343.75 2000 5750 1125 4625

BThe FIFO method produces the higher ending inventory because costs have been rising. Under this method, the earliest costs are assigned to cost of goods sold and the latest costs remain in ending inventory. The LIFO method produces the higher cost of goods sold because costs have been rising. Under LIFO the most recent costs are charged to cost of goods sold and the earliest costs are included in the ending inventory. CBecause in the average costing method we use an average cost, the cost of goods sold is less than that of the LIFO method but more than that of the FIFO method, the Cost of ending inventory is less than that of the FIFO method but higher than that of the LIFO method. Part two Sara camera shop uses Inc. uses the lower of cost or market basis for its inventory. The following data are available at December 31 Units Cameras Minolta Canon Light Meters Vivtar Kodak 5 7 12 10 Cost/Unit 175 150 125 115 cost per unit to use 160 150 119 115 Market Value/Unit 160 152 119 135

Units Cameras Minolta Canon Light Meters Vivtar Kodak 5 7 12 10

Cost to report $ 800 1050 1428 1150

MBA Khartoum University2012 Financial Accounting Final Exam Solution

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Part three At the end of 2011 madani company has accounts receivable of 700000 and an allowance for doubtful accounts of 28000. On January 24 2012 it is learned that the companies receivables from Halfa Inc is not collectable therefore management authorizes a write off of 3000. Prepare the journal entries to the write off What is the cash realizable value of the accounts receivable before and after the writeoff Date Account Title and Expalnation Allowance for Doubtful Accounts Accounts ReceivableHalfa (To record write off of Halfa account) Here we already have an account established for doubtful debts allowances and any write of is debt entry to the allowance account and a credit entry to the receivables account by the amount of uncollectable receivable to be written off, here both the allowance account and the accounts receivable account will be reduced Cash realizable value Before writeoff Accounts receivable Allowance for doubful accounts Cash realizable value $700,000 28,000 $672,000 After writeoff 697000 25000 672000 DR 3000 3000 CR

To obtain cash realizable value we subtract the balance of allowance for doubtful debts account from the balance of the accounts receivable account Before write off the balance is the one given initially, after write off the balance for both allowance for doubtful accounts and accounts receivable is reduced by the written of accounts receivable amount .And eventually at the end the net cash realizable value is the same for before and after write off it does not change. Question three ADuring October Blue Light Company experiences the following transactions in establishing a petty cash fund. Oct. 1 a petty cash fund is established with a check for 100$ issued to the petty cash custodian Oct. 31 a count of petty cash fund disclosed the following items: Currency 5$ Coins 0.4$ Expenditure receipts vouchers Office supplies 28.10$ Telephone internet fax 16.4$ Postage 42.0$ Freight out 8.1$ Required: Journalize the entries in October that pertain to the petty cash fund

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Date Oct. 1

Oct. 31

Oct. 31

Account Title and Explanations Petty Cash Cash (To establish a petty cash fund) Office supplies Telephone internet fax Postage Freight out cash (To replenish petty cash fund) Petty Cash Cash (To increase petty cash fund to 200)

DR 100

CR 100

28.1 16.4 42 8.1 94.6 100 100

Oct. 1 When the company establishes the petty cash fund, it issues a check payable to the petty cash custodian for the amount. Oct. 31 The Company does not make an accounting entry to record a payment at the time it is taken from petty cash. Instead, the company recognizes the accounting effects of each payment when the fund is replenished Note that the reimbursement entry does not affect the Petty Cash account. Replenishment Changes the composition of the fund by replacing the petty cash receipts with cash, but it does not change the balance in the fund. Companies should replenish a petty cash fund at the end of the accounting period, regardless of the cash in the fund. Replenishment at this time is necessary in order to recognize the effects of the petty cash payments on the financial statements. Oct. 31 the company will make no additional entries to the Petty Cash account unless the stipulated amount of the fund is changed. For example, if Blue Nile Company decides on Oct. 31 to increase the size of the fund to $200, it would debit Petty Cash $100 and credit Cash $100.

B-On July 31, 2012, Khartoum company had a cash balance per books of $6,140. The statement from Faisal Bank on that date showed a balance of $7,695. A comparison of the bank statement with the Cash account revealed the following facts. 1. The bank service charge for July was $26. 2. The bank collected a note receivable of $1,800 for Khartoum Company on July 15, plus $30 of interest. The bank made a $10 charge for the collection. 3. The July 31 receipts of $1,193 were not included in the bank deposits for July. 4. Company check No. 2480 issued to H. Ali, a creditor, for $384 that cleared the bank in July was incorrectly entered in the cash payments journal on July 10 for $348. 5. Checks outstanding on July 31 totaled $1,480. 6. On July 31, the bank statement showed an NSF charge of $490 for a check received by the company from A. Hussein, a customer, on account. Instructions (a) Prepare the bank reconciliation as of July 31. (b) Prepare the necessary adjusting entries at July 31.

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Khartoum Company Bank Reconciliation 31-Jul Cash balance per bank statement Add: Deposits in transit Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of note receivable($1800 plus accrued interest $30,less collection fee $10 Less: NSF check Bank service charge Error in recording check No. 443 Adjusted cash balance per books $7,695 1,193 1480 $7,408 $6,140 1820 -490 -26 -36 $7,408

The error in recording the check caused the cash payments to be less then it should and cash payments are a credit account thus to correct this we increase the credit account by the amount 384-348=36 and since this is a credit account it is subtracted from the book balance

Adjustment Entries Date Account Title and Expalnation Cash Miscellaneous Expense Notes Payable Interest Revenue (To record collection of note receivable by bank) Miscellaneous Expense Cash (To record Service fees by the bank) Accounts payable to H. Ali Cash (To correct error in recording check2480) Accounts ReceivableA. Hussein Cash (To record NSF check) DR 1820 10 CR

31Jul

1800 30

26 26

31

36 36

31

490 490

31

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C-On December 31, 2011, Bahri Company had 1,000,000 shares of $1 par common stock issued and outstanding. The stockholders equity accounts at December 31, 2011, had the balances listed here. Common Stock $1,000,000 Additional Paid-in Capital 100,000 Retained Earnings 800,000 Transactions during 2011 and other information related to stockholders equity accounts were as follows. 1. On January 9, 2011, issued at $8 per share 100,000 shares of $5 par value, 9% cumulative preferred stock. 2. On June 10, 2012, declared a cash dividend of $1 per share on the common stock outstanding, payable on July 10, 2011, to stockholders of record on July 1, 2012. 3. On December 15, 2011, declared the yearly cash dividend on preferred stock, payable December 28, 2011, to stockholders of record on December 15, 2012. 4. Net income for the year was $2400000. At December 31,2011 the market price of the common stock was 12$ per share Required: Prepare the stockholders equity section of Bahri Companys balance sheet at December 31,2011

The term outstanding stock means the number of shares of issued stock that are being held by stockholders The term cumulative means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends. Dividends on preferred stock= 9% *100000 shares* 5$ par value= 5000$ for the year 2011 Retained earnings to be recorded= balance retained earnings +net income-cash dividends Retained earnings to be recorded=800000+2400000-(1000000+15000)=2185000$ Since the balance of additional paid in capital is given as 100000 and it is given that all common stock was issued at par value then this means that all in excess of par value is due to the preferred stock which equals 100000$, from this we can obtain the number of outstanding preferred stock We have par value of preferred stock =5$ per share We are given that the preferred stock was sold at 8$ per share which means in excess by 3$ per share So if the total additional paid in capital is 100000$ and the excess per share is 3$ Then the number of preferred stock outstanding= 100000/3= 33333 shares preferred stock The transactions that occurred can be shown as followed to aid in the construction of the partial balance sheet:

MBA Khartoum University2012 Financial Accounting Final Exam Solution

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Date

Account Title and Expalnation Cash Common Stock

DR 1000000

CR

1000000

January 9 2011

Cash Preferred Stock Paid-in Capital in Excess of Par ValuePreferred Stock (To record the issuance of 10,000 shares of $5 par value preferred stock)

266665 166665 100000

june 10 2011

cash dividends dividends payable (To record declaration of cash dividend for common stock holders at 1 per share)

1000000 1000000

december 15 2011

cash dividends dividends payable (To record declaration of cash dividend for preferred stock holders at 9% outstanding 33333 shares of 5$ par value)

15000 15000

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Bahri Company Balance Sheet (partial) For the year ended 31 December 2011 Stockholders equity Paid-in capital Capital stock 9% preferred stock, $5 par value, cumulative, 100000 shares issued and 33333 shares outstanding Common stock 1%par value 10000000 issued and outstanding Total capital Stock 166665 1000000 1166665

Additional paid-in capital In excess of par valuepreferred stock Total additional paid-in capital

100000 100000

Total paid-in capital Retained earnings Total Stock Holders Equity

1266665 2185000 3451665

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Question four: A-White Nile Company purchased a new machine on September 1, 2010 at a cost of 96000. The company estimated that the machine has a salvage value of 6000. The machine is expected to be used 70000 working hours during its eight year life. Required: Compute depreciation using the following methods in the year indicated A. Declining method using double the straight line rate for 2010 and 2011 B. Units of activity for 2010 assuming machine usage was 2900 hours C. Straight line method for 2010 Solution: Depreciable cost= cost salvage value Depreciable cost= 96000-6000= 90000$ The machine was purchased on September 1 2010 and will be retired and sold for 6000 salvage value after eight years which is September 1 2018 thus we will have in year 2010 only four month from September to December and in the last year 2018 only eight month from January till August. A-double declining Straight line method depreciation rate Eight years; depreciation rate= 1/8=12.5% Thus the double declining expense rate= 12.5*2=25% Here we are required to calculate from year 2010 and the year 2011 When calculating the declining method we begin with the book value and not the depreciable expense 2010 depreciation= book value* depreciation rate* no of month/12 = (96000)* (25%) *( 4/12)=8000$ 2011 depreciation = (96000-8000) * 25% *12/12= 22000$ (notice book value) Depreciation schedule Depreciation Schedule multiply = Year Beginning of Depreciation Annual depreciation Accumulated year rate expense depreciation 2010 96000 25% 8000 (only 4month) 8000 2011 88000 25% 22000 30000

Book value 96000-8000=88000 96000-30000=66000

B- Units of activity Depreciation per unit=Depreciable cost/ total number of units ofactivities Depreciation per unit= 90000/70000= 1.28571$ per hour Depreciation = No of units* Depreciation per unit Depreciation 2010= 29000*1.28571= 3729 $ C- Straight line method Depreciable cost / useful life = depreciable expense Depreciable expense= 90000/8= 11250 $ per year For the year 2010 depreciation= depreciable expense * no of month/12 For the year 2010 depreciation= 11250*4/12= 937.5$

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B- Condensed financial data of Red Sea Inc Follow

Red Sea INC. Comparative Balance Sheets 31-Dec


2011 Assets Cash Accounts receivable Inventory Prepaid expenses Investments Plant assets Accumulated depreciation Total Liabilities and Stockholders Equity Accounts payable Accrued expenses payable Bonds payable Common stock Retained earnings Total 2010 Change

90800 $48,400 42400 92800 33000 59800 112500 102850 9650 28400 26000 2400 138000 114000 24000 270000 242500 27500 (500000) (52000) not used 682500 514750 112000 16500 110000 220000 224000 682500 67300 44700 17000 (500) 150000 (40000) 175000 45000 105450 not used 514750

Red Sea Inc Income Statement For the Year Ended December 31, 2011
Sales Less: Cost of goods sold Operating expenses, excluding depreciation Depreciation expense Income taxes 27,280 Interest expense 4,730 Loss on sale of plant assets 7,500 233,880 Net income 392780 135460 12410 46500 27280 4730 7500 233880 158900

1. 2. 3. 4. 5.

Additional information: New plant assets costing 85000$ were purchased for cash during the year. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. Bonds matured and were paid off at face value for cash. A cash dividend of $40350 was declared and paid during the year. All transactions regarding acquiring of investments and issuance of common stock were made for cash

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Required: Prepare a statement of cash flows using the indirect method

Red Sea Inc Statement of Cash Flows For the Year Ended December 31, 2011 Cash flows from operating activities Net income $158,900 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense $46,500 Loss on sale of plant assets 7,500 Increase in accounts receivable (59,800) Increase in inventory (9,650) Increase in prepaid expenses (2,400) Increase in accounts payable 44,700 Decrease in accrued expenses payable (500) 26,350 Net cash provided by operating activities 185,250 Cash flows from investing activities Sale of plant assets 1,500 Purchase of plant assets (85,000) Purchase of investments (24,000) Net cash used by investing activities (107500) Cash flows from financing activities Sale of common stock 45,000 Payment of cash dividends (40,350) Redemption of bonds (40,000) Net cash used by financing activities (35,350) Net increase in cash 42,400 Cash at beginning of period 48,400 Cash at end of period $90,800

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