THE UNIVERSITY OF

NEW SOUTH WALES

School of Accounting
ACCT 1501: Accounting and Financial Management lA

FINAL EXAMINATION PAPER

SESSION 1,2006
This is a three (3) hour paper.
You have ten (10) minutes reading time.
There are six (6) questions.
There are eight (8) pages, including this one.
You must answer all parts of all questions.
The questions are not of equal value.
All answers must be written in blue or black ink.
Show all relevant working.
This paper forms 55% of the assessment in this course.
This paper may be retained by the candidate.

Do not turn the page until instructed by the examination supervisor.

Question 1

[10 marks]

Cash

The bank statement for Eastpark Ltd for June 30, 2005 indicates a credit balance of
$9,143.11. All cash receipts are deposited each evening in a night depository, after
banking hours. The accounting records indicate the following summary data for cash
receipts and payments for June:
$ 3,943.50 DR
Cash balance as of June 1
Total cash receipts for June
28,971.60
Total amount of cheques issued in June 28,388.85
Comparing the bank statement and the accompanying cancelled cheques and
memorandums with the records reveal the following reconciling items:
a. The bank had collected for Eastpark Ltd $1,030 on a note left for collection.
The face value of the note was $1,000, with the remaining $30 being interest.
b. A deposit of $1,852.21, representing receipts of June 30, had been made too
late to appear on the bank statement.
c. Cheques outstanding totalled $5,265.27.
d. A cheque (#46) drawn for $139 had been incorrectly charged by the bank as
$157.
e. A cheque (#48) drawn for $30 had been incorrectly recorded in the company's
records as $240. The cheque was for the payment of an obligation to Avian
Equipment Ltd for the purchase of supplies on account.
f.

Bank service charges for June amounted to $18.20.

Required:

1. Prepare a bank reconciliation for June. [5 marks]

2. Journalise the necessary entries. The accounts of Eastpark Ltd. have not been
closed. [3 marks]
3. Explain what non-sufficient funds cheques are.
adjusted cash balance? [2 marks]

How would they impact the

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1
Question 2

Receivables

[10 marks]

The Genius Gallery had a credit balance of $30,000 in its allowance for doubtful
debts account on January 1. During the current fiscal year ended December 31, the
following transactions relating to customers' accounts were completed:
Feb 21

Reinstated the account of Cosmos Ltd, which had been written off in the
preceding year as uncollectible. Journalised the receipt of $2,025 cash in
full payment of Cosmos' account.

Mar 31

Wrote off the $5,500 balance owed by Angus Co., which is bankrupt.

July 7

Received 35% of the $8,000 balance owed by Merton Co., a bankrupt

business, and wrote off the remainder as uncollectible.

Aug29

Received $900 cash from Lotus Ltd, whose account ($1,200) had been
written off two years earlier as uncollectible. The remaining balance is
confirmed to be unrecoverable.

Dec28

Wrote off the following accounts as uncollectible (compound entry):

Dailey Co., $10,500; Sushi Co., $7,260; Zheng Furniture, $3,775;
Lavender Co., $2,820.

Required:
1. Journalise the above transactions in a good format. Journal entry narrations are not

required. [5 marks]
2. Based on an analysis of the $787,550 (closing balance) of accounts receivable, it
was estimated that $32,500 will be uncollectible. Reconstruct the T-account for
allowance for doubtful debts to determine the amount of bad debts expense for the
year? [1 mark]
3. Determine the expected net realisable value of the accounts receivable as of
December 31. [1 mark]
4. Assuming that instead of basing the provision for uncollectible accounts on an
analysis of receivables, the adjusting entry on December 31 had been based on an
estimated expense of Yz of 1% of the net sales of $7,400,000 for the year,
determine the following:
a. Bad debts expense for the year. [1 mark]
b. Balance in the allowance account after the adjustment of December 31.
[1 mark]
c. Expected net realisable value of the accounts receivable as of December 31.
[1 mark]

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Question 3

Inventory

[20 marks]

Kingsford Ltd's beginning inventory and purchases during the year ended December
31, 2005 were as follow:

1,000
1,200

Unit
Cost
$50.00
52.50

800

55.50

2,000

56.00

Units
Jan 1
Mar 10
Jun 25
Aug30
Oct 5
Nov26
Dec 31

Inventory
Purchases
Sold 800 units
Purchases
Sold 1,500 units
Purchases
Sold 1,000 units

Required:
1. Determine the cost of inventory on December 31, 2005, using the perpetual
system and each ofthe following costing methods:

a. FIFO [4 marks]
b. LIFO [4 marks]
2. Determine the cost of inventory on December 31, 2005, using the periodic system
and each of the following costing methods:
a. FIFO [3 marks]
b. LIFO [3 marks]
c. Average cost [3 marks]
3. Assume that during the fiscal year ended December 31,2005, sales were $290,000
and the estimated gross profit percentage was 40%. Estimate the ending inventory
at December 31,2005, using the gross profit method. [3 marks]

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Question 4

[20 marks]

Non-Current Assets

Part 1
Pinot Noir Ltd has acquired a new building for $500 000. In the acquisition process, it
incurred incidental costs of $10 000 for legal fees, real estate agent's fees and stamp
duties. Management believes that these costs should be expensed, as they have not
increased the value of the building because, if the building were to be resold immediately,
these amounts would not be recouped. In other words, the fair value of the building is
$500 000. Twelve months later, an independent valuer estimated the fair value of the
building to be $500 000.
Required:

Discuss how these costs should be accounted for:

a.
At acquisition date [2.5 marks]
b.
Twelve months later assuming the asset is measured under the cost model
[1 mark]
c.
Twelve months later assuming the asset is measured under the fair value model
[1 mark]
Part 2
On 1 July 2005, Shiraz Ltd purchased a bottling machine and a storage tank for cash.
Information on these assets is as follows:

Bottling Machine
Storage Tank

Cost
$100000
60000

Expected useful life

5 years
3 years

Both the bottling machine and the storage tank: are expected to generate benefits evenly
over their useful lives. Shiraz Ltd. classifies these two assets in different asset classes.
Shiraz Ltd measures all classes of plant and equipment using fair value.
At 30 June 2006, information about the assets is as follows:
Fair Value
Expected useful life
Bottling Machine
4 years
$84000
38000
2 years
Storage Tank
On 1 January 2007, the storage tank was sold for $29 000 cash. Shiraz Ltd also made a
bonus issue of 10 000 shares at $1 per share, using $8 000 from the general reserve and
$2 000 from the revaluation reserve.
At 30 June 2007, information on the bottling machine is as follows:
I
I Fair value
Expected useful life
I Bottling Machine
I $60 000
5 years

I
I

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Required:
Assuming reporting dates are 30 June 2006 and 30 June 2007; prepare the journal entries
in the records of Shiraz Ltd to record the following. Note that journal entry narrations are
not required.
a.
Entries required at 1 July 2005 [1.5 marks]
b.
Entries required at 30 June 2006 [6 marks]
c.
Entries required at 1 January 2007 [4.5 marks]
d.
Entries required at 30 June 2007 [3.5 marks]
Question 5

Liabilities

[14 marks]

Part 1
Tango Ltd issues $10 million of five-year, 10 per cent, semi-annual coupon debentures to
the public (which pay interest each six months) on 30 June 2005. The market requires a
rate of return of 10 per cent.
Required:
Provide the accounting entries to record the following. Note that journal entry narrations
are not required.
a.
The issuance of the debentures at 30 June 2005 [1 mark]
b.
The first payment of interest at 31 December 2005 [1 mark]
c.
Entries required at 30 June 2010 [2 marks]

Part 2
Tango Ltd issues $10 million of five-year, 10 per cent, semi-annual coupon debentures to
the public (which pay interest each six months) on 30 June 2005. The market requires a
rate of return of 12 per cent. The chief accountant for Tango Ltd has calculated the issue
price of the debentures, that is the present value of their future cash flows, to be
$9,264,050.
Required:
Provide the accounting entries at 30 June 2005 and 31 December 2005 to record the
following. Note that journal entry narrations are not required.
a.
The issuance of the debentures [2 marks]
b.
The first payment of interest [2 marks]

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Part 3

The following items occurred in Salsa Ltd for the year ended 30 June 2006:
a.

b.

c.

Salsa Ltd has a policy of refunding dance tuition if students are dissatisfied even
though it is under no legal obligation to do so. Its policy of making refunds is
generally known and is one reason beginning dancers come to their studios for
dance lessons. Salsa Ltd tracks the number of lessons refunded. [2 marks]
Salsa Ltd has decided to enter into a contract with Cha Cha Cha Ltd to acquire
some dance studios at a cost of $1 000 000. On 8 July 2006, Salsa Ltd paid a
10% deposit. [2 marks]
Salsa Ltd has a regular maintenance program for its dance studios. In order to
provide for this program, the company has been in the habit of establishing a
Provision for Studio Maintenance account and disclosing it as part of liabilities.
[2 marks]

Required:
Salsa has employed you to give an opinion as to the appropriateness of their accounting
treatment for the above items. Discuss how the above items should be treated in Salsa
Ltd's financial statements for the year ended 30 June 2006.

Question 6

Media

[16 marks]

Losses Blow Out For One.Tel, Australian Financial Revie'vl', 2 August 2000

Junior telecommunications player One.Tel will not break even until at least 2003 after
revealing it is likely to lose almost $300 million in 1999-2000 and a similar amount this
financial year. One.Tel expects to report an annual loss before interest and tax of $297
million next month. The company will write off $205 million primarily related to
European start-up expenses and $40 million stemming from the 1998-99 financial year.
The company's joint managing director, Mr Brad Keeling, said One.Tel would have "a
similar EBIT [earnings before interest and tax] number over the next 12 months". Mr
Keeling said 2003 was the company's likely break-even year. "We're expensing customer
acquisition costs as they're incurred," Mr Keeling said, referring to One.Tel's decision to
no longer defer and amortise start-up and customer acquisition costs following a battle
with the Australian Securities and Investments Commission. "There's a cash-flow catchup, and the more successful we are, the more we have to write off." One.Tel has largely
been financed by Mr Kerry Packer's Publishing and Broadcasting and Mr Rupert
Murdoch's News Corp. Those companies have committed a total of more than $1.1
billion, although Mr Keeling said One.Tel's immediate capital expenditure requirements
could be now met from its $320 million in cash reserves. Next month One.Tel expects to
report a 97.5 per cent increase in total sales from $326 million to $644 million. Its
subscriber base more than tripled to 1.8 million in the year to June 30, with most new
customers in Britain. While the company will formally release its results on September 5,
analysts greeted its likely loss with concern. "It's not a good sign," said D&D Tolhurst
analyst Mr Bill Bannister. Mr Keeling said: "We're an attractive girl at the dance at the
moment. As a strategic or financial partner ... we would be a good fit for somebody. But
we're not actively seeking that." One.Tel shares closed 0.8cents firmer at $1.078

Required:

a.

"Start up and customer acquisition costs" relate to expenditure made in

an attempt to gain customers. These costs may include such items as
advertising, promotional "give-aways" such as phone handsets and
accessones.
1. Prior to 2000 how did One.Tel classify these costs in their
financial statements (ignore the cash flow statement)? [2
marks]

b.

c.

2. Name the specific criteria that would have to be met to justify

the accounting treatment that you identified in a.I... [5 marks]
In 2000 One.Tel changed its treatment after a "battle with the
Australian Securities and Investments Commission."
1. How did One.Tel classify these costs in the 2000 financial
statements (ignore the cash flow statement)? [2 Marks]
2. Briefly present arguments to support the One.Tel and the ASIC
position in relation this dispute? Which argument do you
favour and why? [5 marks]
Explain how the cash flow ofOne.Tel would be affected by the change
in accounting treatment (ignoring income tax effects). [2 Marks]

THIS IS THE END OF THE EXAM