TERM 1 2000-01 EXAMINATION

DEGREE OF BACHELOR OF BUSINESS MANAGEMENT

NOVEMBER 2000

ACCT101 FINANCIAL ACCOUNTING

INSTRUCTIONS TO STUDENTS
1

The time allowed for this examination paper is 3 hours.

This examination paper comprises five (5) questions and two (2) tables, and
consists of eleven (11) pages.

Answer ALL questions.

The total number of marks is 100.

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ACCT101
Question 1
x
x
x

Select the best answer to each of the questions below and write down the
corresponding letter (a, b, c or d) in your ANSWER BOOKLET.
2 marks will be awarded for each correct answer; mark will be deducted for an
incorrect answer.
This question carries a 30 marks

1. The accounts of A Ltd as at 30 June 2000 show the followings:

Overdraft balance of $3,000
Notes payable of $2,500
Notes receivable of $3,500
Accounts payable of $4,300
Service revenue of $7,000
Prepaid rent of $1,500
Unearned revenue $4,000
Warranty liability $900
Allowance for bad debts 800
Rent Expense of $1,800.
Based on the above data, how much are its total liabilities?
a) $6,800
b) $9,800
c) $10,800
d) $14,700
2. Cash-basis accounting
a) results in a higher income being reported than accrual-basis accounting
b) results in a lower income being reported than accrual-basis accounting
c) leads to the reporting of more complete information than does accrual basis
accounting
d) is not acceptable under generally accepted accounting principles
3. A firm received $6,000 in advance for services to be rendered later. The
accountant debited Cash and credited Unearned Revenue for $6,000. At the end
of the accounting period, $1,100 remains unearned. The end of period adjusting
entry will be
a) debit unearned revenue and credit revenue for $4,900
b) debit unearned revenue and credit revenue for $1,100
c) debit revenue and credit unearned revenue for $4,900
d) debit revenue and credit unearned revenue for $1,100
4. The classification of assets and liabilities as current or long-term depends on
a) whether they appear on the balance sheet or the income statement
b) the relative liquidity of the items
c) the T-format or report format of the balance sheet
d) whether they are permanent or temporary accounts

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ACCT101
5. Sales total $880,000, cost of goods sold is $420,000, selling expenses are
$100,000, operating expenses are $220,000 and non-operating expenses are
$30,000 and non-operating revenue $50,000. How much is net income?
a) $380,000
b) $280,000
c) $160,000
d) $30,0000
6. The closing entry for Purchase Discounts under the periodic inventory system is
a) Dr. Purchase Discounts & Cr. Retained Earnings (Income Summary)
b) Dr. Purchase Discounts & Cr. Inventory
c) Dr. Retained Earnings (Income Summary) & Cr. Purchase Discounts
d) Dr. Inventory & Cr. Purchase Discounts.
7. Which of the following bank reconciling items requires adjusting journal entries
to the accounts of the company?
a) error in the books of the company
b) outstanding cheques
c) outstanding deposits
d) error in the bank statement
8. At 1 January 1999 the balance in the Allowance for Bad Debts account was
$14,300. On 31 July 1999, $24,000 of accounts receivable was written off. On 28
August 1999, the company recovered $42,500 of accounts receivable previously
written off. The aging of the accounts indicates that an allowance of $78,900 is
needed for 1999. The bad debt expense for 1999 is
a) $18,500
b) $64,600
c) $74,700
d) $46,100
9. XYZ Ltd is a defendant in a lawsuit for damages of $55,000. On the balance
sheet date, it appears highly likely that the Court will render a judgment against
the company. How would XYZ report this event in its financial statements?
a) omits this item as no judgment has been rendered
b) discloses the item as a contingent liability in a note to the balance sheet
c) omits the item, as the amount is less than $100,000.
d) reports the loss in the income statement and a liability in the balance sheet

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ACCT101
10. SCL Ltd sold an investment at a profit of $44,000. The investment account
reports a beginning balance of $208,000 and an ending balance of $182,000.
During the year, the company purchased new investments costing $62,000. What
were the proceeds from the sale of investments?
a) $44,000
b) $88,000
c) $114,000
d) $132,000
11. Which of the following is not a contra account?
a) Provision for warranty
b) Provision for depreciation (Accumulated depreciation)
c) Provision (Allowance) for bad debts
d) None of the above
12. The aging of accounts receivable to determine the amount of doubtful debts
a) follows the matching principle closely
b) assumes that the likelihood of collection from a current debt is not as good as
from a non-current debt
c) tends to give a better estimate of uncollectible accounts than other methods, as
consideration is give to the collectibility of all accounts receivable
d) all of the above
13. The inventory costing method that closely matches current cost of goods sold
with current revenue is
a) LIFO method
b) FIFO method
c) Weighted-average cost
d) All the above
14. Travel Ltd with a financial year-end of 31 December, purchased a motorcar on 1
July 1994 that costs $100,000. The estimated useful life of the motorcar at the
time of acquisition was 10 years with an estimated residual value of $10,000.
Travel Ltd sold the car on 30 June 2000 for $34,000. Determine the loss arising
from the disposal assuming that depreciation is on a straight-line basis.
a) Loss on disposal of $12,000
b) Loss on disposal of $ 6,000
c) Loss on disposal of $66,000
d) Loss on disposal of $20,000
15. Under the revenue recognition principle, revenue is recognised
a) at the earliest acceptable time
b) at the latest acceptable time
c) after it has been earned and collectibility is assured
d) when there is no doubt at all with the collection of cash

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ACCT101
Question 2
James and Grace are considering the purchase of the business of Compass Limited.
The company provides consulting services to small and medium enterprises. They are
shown the companys income statements. Details are as below:
Compass Limited
Income Statements
For the year ended 31 December
1999
Unaudited
Revenues:
Consulting services
Commissions on sales of equipment
Expenses:
Salary expense
Rent and Utility expense
Interest expense
Promoting and advertising expense
Office expense
Insurance expense
Depreciation expense
Net income before tax
Income tax at 26%
Net income for the year
EPS

345,000
75,000
120,000
36,000
26,000
28,000
8,000
3,000
4,000

420,000

225,000
195,000
50,700
144,300
$1.44

1998
Audited
225,000
85,000
100,000
36,000
18,600
15,000
6,000
2,400
4,000

310,000

182,000
128,000
33,280
94,720
$0.95

They appoint you to audit the accounts for the year 1999. You discover the following:
1. Consulting services revenue includes a receipt of $24,000 on 1 October 1999
for work to be completed by 31 March 2000.
2. The company was owed at 31 December 1999 $2,000 commission by an
original equipment manufacturer.
3. The 2 directors of the company Mr. and Mrs. Leong Ah Lek had not been paid
their December 1999 salary of $5,000 and $4,000 respectively. The amounts
were not been included in the salary expense for the year. (Ignore CPF)
4. A new equipment purchased on 1 July 1999, costing $10,000 had not been
depreciated. The company usually depreciates its equipment over 3 years on
90% of the cost of the equipment, using the straight-line method.
5. The insurance expense includes a fire insurance policy that covers the period
from 1 July 1999 to 30 June 2000. The premium on this policy was $1,200.
Required:
(a) Prepare a new Income Statement for the year ended 31 December 1999, taking
into account the necessary adjustments to reflect more accurately the results of
the operations.
(10 marks)

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ACCT101
(b) Based on the information at hand and any other information you may require,
advise James and Grace on the offer to purchase the business of Compass
Limited.
(6 marks)
Total: 16 marks
Question 3
SCL Limited uses historical cost accounting. The following events took place in
1999:
(a) A new office photocopier was purchased at an auction for $8,000. A
similar machine would cost $15,000 if purchased new from the
companys usual supplier.
(b) Three days before the financial year-end, the company entered into an
agreement with a customer for the sale of a specialized inventory item
to be delivered in the following year. The contract value was $60,000.
The company received a deposit of $25,000 and the balance to be
received on delivery of the inventory.
(c) A customer sued the company for damages on the ground that one of
the companys products, which he earlier purchased from a retail outlet
caused him to gradually lose his sight. The legal advisor to the
company was of the opinion that this was a frivolous suit with little or
no chance of success.
(d) One of the companys warehouses was destroyed in a fire. The loss
comprised the following:
Warehouse, at cost
Less accumulated depreciation

$600,000
250,000

Inventory stored at the warehouse, at cost

Total

$350,000
400,000
$750,000

The company had accepted the offer of $600,000 as compensation

from the insurance company.
Required:
How would each of the above items (a, b, c and d) be treated/recorded in the
accounts of the company at the year-end?
12 marks

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ACCT101
Question 4
(a)

On 1 January 1999, KTA Ltd signed a non-cancelable agreement to lease a

machine from Singapore Leasing Corporation. The agreement requires
payments of $20,000 on 30 June and $20,000 on 31 December each year for 6
years. At the end of the lease period, KTA will own the machine. The
applicable interest rate was 10%. KTA paid the first two installments of
$20,000 each in 1999. The company usually depreciates similar machine on
90% of the cost over 8 years, using the straight-line method.
Required:
(i)
(ii)

(b)

Use journal entries to record the above in the books of the company
for the year 1999. (Round up to the nearest $)
Show how the lease is disclosed in the balance sheet at the yearend.
(8 marks)

TTK Ltd, an equipment manufacturer is in financial difficulty. Another

company that has its own exclusive suppliers and contractors has just acquired
its main customer. TTK has since been advised that its current contract with
the customer will be terminated forthwith. In addition, TTK requires extensive
retooling of its manufacturing facilities. Cash flow from current operation is
negative. The CEO is considering two proposals: (i) a 5-year term loan at an
interest rate of 12%, to be secured by the leasehold property of the company.
The current prime rate is 6%. (ii) a bond issue carrying a coupon rate of 10%.
There is a risk that the bonds may have to be discounted.
Required:
Which financing alternative would you recommend to the company?
(6 marks)
Total: 14 marks

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ACCT101
Question 5
The Balance sheet of Evans Limited as at 1 January 1999 shows the following:
$000
Current Assets
Cash at bank and on hand
Trading securities
Accounts receivable
Inventory, at cost

436
390
450
520
1,796

Non Current Assets

Leasehold buildings, at cost
Less Accumulated depreciation
Equipment, at coat
Less Accumulated depreciation
Shares in GLC Limited, at cost

1,350
(675)
600
(350)
330
1,255
$3,051

Total Assets
Current liabilities
Accounts payable
Dividends payable
Income tax payable

560
178
456
1,194

Long term liabilities

Mortgage payable

350

Owners equity
Share capital ($1 par value)
Share premium
Retained earnings

1,200
220
87
1,507

Total Liabilities and Owners Equity

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$3,051

ACCT101
The audited Income Statement for the year ended 31 December 1999 is set out
below:
$000
Operating revenue
Sales revenue (net)
Less Cost of Goods sold
Gross Margin
Operating expenses
Operating expenses (other than below)
Depreciation expense on leasehold buildings
Depreciation expense on equipment
Operating income
Other Operating revenue
Profit from sale of trading securities
Profit from sale of equipment
Dividends received
Net Income before tax and dividends
Income Tax
Net Income after tax
Dividends: Interim
Proposed
Net income for the year
Add retained earnings of previous years
Total retained earnings at 31 December 1999

$000
8,000
4,500
3,500

1,120
309
125
250
6
24

118
237

1,554
1,946

280
2,226
568
1,658
355
1,303
87
$1,390

The following additional information is provided:

1. At 31 December 1999, $635,000 of the accounts receivable remained
uncollected and accounts payable of $660,000 had not been paid.
2. Inventory as at 31 December 1999 was determined at $680,000.
3 The company sold part of the trading securities for $400,000 during the year.
The remaining trading securities at the year-end had a cost of $240,000.
4 Equipment costing $300,000 with an accumulated depreciation of $80,000
was sold for $226,000. New equipment was purchased to bring the cost of
equipment to $900,000 at the year-end.
5. Additional leasehold buildings of $1,218,000 were purchased in 1999.
6. The company made a further investment of $95,000 in GLC Limited in 1999.
7. A freehold land adjacent to the companys current premises was acquired for
$1,056,000 in 1999.
8. During the year, the company paid $431,000 in taxes and $296,000 in
dividends, including the interim dividend of $118,000.
9. The long-term liability, mortgage payable was discharged before the year-end.
10. During the year the company issued 400,000 new shares to its existing
shareholders at $2 per share.
11. At 31 December 1999, the company had an overdraft balance of $25,000.

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ACCT101
Required:
(a)
(b)
(c)

Prepare the balance sheet of Evans Limited as at 31 December 1999

(10 marks)
Prepare the cash flow statement for the year ended 31 December 1999
(12 marks)
The directors of the company were concerned that although the net income for
the year was at a record high of $1,303,000, the company still had an overdraft
balance of $25,000 at the year-end. Explain how such a position can occur.
(6 marks)
Total: 28 marks

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ACCT101

Present Value of $1 at the end of t years = 1/(1+r)^t

Number of years
5%
6%
7%
1
2
3
4
5
6
7
8
9
10
11
12

0.952
0.907
0.864
0.823
0.784
0.746
0.711
0.677
0.645
0.614
0.585
0.557

0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
0.527
0.497

0.935
0.873
0.816
0.763
0.713
0.666
0.623
0.582
0.544
0.508
0.475
0.444

8%

9%

10%

11%

12%

0.926
0.857
0.794
0.735
0.681
0.630
0.583
0.540
0.500
0.463
0.429
0.397

0.917
0.842
0.772
0.708
0.650
0.596
0.547
0.502
0.460
0.422
0.388
0.356

0.909
0.826
0.751
0.683
0.621
0.564
0.513
0.467
0.424
0.386
0.350
0.319

0.901
0.812
0.731
0.659
0.593
0.535
0.482
0.434
0.391
0.352
0.317
0.286

0.893
0.797
0.712
0.636
0.567
0.507
0.452
0.404
0.361
0.322
0.287
0.257

Annuity table: Present Value of $1 per year for each of t years

Number of years
5.%
6%
7%
8%
1
2
3
4
5
6
7
8
9
10
11
12

0.952
1.859
2.723
3.546
4.329
5.076
5.786
6.463
7.108
7.722
8.306
8.863

0.943
1.833
2.673
3.465
4.212
4.917
5.582
6.210
6.802
7.360
7.887
8.384

0.935
1.808
2.624
3.387
4.100
4.767
5.389
5.971
6.515
7.024
7.499
7.943

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0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536

9%

10%

11%

12%

0.917
1.759
2.531
3.240
3.890
4.486
5.033
5.535
5.995
6.418
6.805
7.161

0.909
1.736
2.487
3.170
3.791
4.355
4.868
5.335
5.759
6.145
6.495
6.814

0.901
1.713
2.444
3.102
3.696
4.231
4.712
5.146
5.537
5.889
6.207
6.492

0.893
1.690
2.402
3.037
3.605
4.111
4.564
4.968
5.328
5.650
5.938
6.194