TERM 2 2001-02 EXAMINATION

APRIL 2002

ACCT101
FINANCIAL ACCOUNTING
INSTRUCTIONS TO STUDENTS
1. This paper consists of two parts, Part A and Part B, printed on a total of 10 pages (for a
total of 100 marks, plus 5 bonus marks). PLEASE CHECK BEFORE COMMENCING.
This is a FINAL paper.
2. The time allowed for this examination paper is 3 (three) hours.
3. Part A consists of 6 questions (70 marks, plus 5 bonus marks). You are to answer ALL
questions and show ALL relevant calculations when appropriate.
4. Part B consists of 15 Multiple Choice Questions (30 marks). You are to write in your
answer booklet the most appropriate answer. Each correct answer is worth 2 marks and
a penalty of marks will be applied to any incorrect answer.

ACCT101 Financial Accounting

Term 2 2001/2

PART A (3 questions, total 70 marks)

Question 1 (15 marks)
The comparative Balance Sheets of Bon Voyage Luggage Co. at Dec 31, 2001 and 2000, are
as follows:
Bon Voyage Luggage Co.
Balance Sheet
Assets
Cash
Accounts Receivable (net)
Inventories
Prepaid expenses
Land
Buildings
Acc. Depn Building
Machinery and Equipment
Acc. Depn Machinery and Equipment
Patents (net amortization)

Liabilities
Accounts payable (merchandise creditors)
Dividends payable
Salaries payable
Mortgage payable (due 2004)
Bonds payable
Common stock, $1 par value
Share premium
Retained earnings

2001 ($)

2000 ($)

163,400
192,400
287,500
8,500
100,000
550,000
(201,500)
275,700
(104,800)
37,400
$1,308,600

134,600
176,400
312,300
6,000
100,000
415,000
(176,000)
295,700
(84,600)
40,000
$1,219,400

131,400
12,000
10,500
50,000

19,000
210,000
875,700
$1,308,600

146,700
10,000
12,800

164,000
15,000
50,000
820,900
$1,219,400

An examination of the income statement and accounting records revealed the following
additional information applicable to 2001:
a. The net income for 2001 was $102,800.
b. Equipment with a cost of $20,000 and accumulated depreciation of $15,000 was sold
for $8,000 during the year.
c. Cash dividend declared $48,000.
d. 4,000 shares of common stock were issued at $41 per share to retire bonds payable
Required:
A. Prepare a COMPLETE statement of cash flows for the year ended
December 31, 2002 for Bon Voyage Luggage Company. Include cash
reconciliation and any necessary schedule. You can use either the indirect
method or the direct method.
B. Is it possible for a company to record a loss and yet have a positive cash
flow from operations and vice versa? Explain.
Page 2

(12
marks)
(3 marks)

ACCT101 Financial Accounting

Term 2 2001/2

Question 2 (10 marks)

On 1 July 2001, Griffindor Corporation entered into a leasing agreement to lease a truck from
Hufflepuff Company. The lease agreement specified payments of $15,000 per year (payable
each year on June 30) for 5 years. The market rate of interest for lease transactions of this type
is 6 percent compounded annually. Griffindor Corporation closes its accounts on 31
December.
Financial Tables
5 periods, 6%

FV factor
1.3382

PV factor
0.7473

FVA factor
5.6371

PVA factor
4.2124

Required:
A. Assuming the lease qualifies as an operating lease, prepare the necessary
journal entries for Griffindor Corp on 1 July 2001, 31 December 2001, and
30 June 2002.
B. Assuming the lease qualifies as a capital lease, prepare the necessary journal
entries for Griffindor Corp on 1 July 2001, 31 December 2001, and 30 June
2002. Ignore the depreciation of the leased asset.
C. Assuming that instead of leasing the asset, Griffindor Corp decides to
purchase the truck from Hufflepuff Company. In return, Griffindor Corp
would issue 10,000 shares of $1 par value to Hufflepuff Company. The
agreed value of the share at the date of the exchange was $6 each. Prepare
the journal entry for the transaction.
D. What are the conditions that will decide whether a lease is an operating
lease or a capital lease?

(3 marks)
(3 marks)

(1
marks)
(2
marks)

Question 3 (8 marks + 2 bonus marks)

Hubba Hubba Ltd. was authorized to issue $500,000 of 8% per annum, four-year bonds, dated
1 May 2001. All the bonds were sold on that date when the effective interest rate was 10%.
Interest is payable on May 1 and November 1 each year. The company follows a policy of
amortizing any premiums or discounts using the effective interest rate method. The company
closes its books on Dec 31 of each year.
Financial Tables
4 periods, 8%
4 periods, 10%
8 periods, 4%
8 periods, 5%

FV factor
1.3605
1.4641
1.3686
1.4775

PV factor
0.7350
0.6830
0.7307
0.6768

FVA factor
4.5061
4.6410
9.2142
9.5491

PVA factor
3.3121
3.1699
6.7327
6.4632

A. Calculate the issuance price of the bonds.

B. Prepare journal entries for Hubba Hubba for the following dates:
1. May 1, 2001
2. Nov 1, 2001
3. Dec 31, 2001
C. BONUS QUESTION: What is the total interest expense over the life of the
bonds?

Page 3

(2 marks)
(6 marks)
(2 marks)

ACCT101 Financial Accounting

Term 2 2001/2

Question 4 (15 marks)

A group of SMU students, including you, are keen to set up a bookshop in Singapore. You
have named it BookTalk Pte Ltd. The company will specialize in selling books that are
published by local authors. Being the entrepreneurial students that you are, you want to
expand the business in 6 months time, believing that there is a good market for your products.
Subsequently, you may either invite venture capitalist to come in at that point in time or to go
to the bank to obtain a loan. Given that, situation, your friends decide that since you are a top
student in the financial accounting class, they would like you to set the companys accounting
policy. You are aware that the decisions you make today has an impact on the kind of
financial statements that you will present to potential investors or the bank in 5 years time.
The following are the crucial issues that you are agonizing over.
Inventories You know that inventories should be valued at the lower of cost and Net
Realizable Value. But you are unable to decide which inventory method to use: perpetual or
periodic. In addition to that you have to decide on the cost flow system to use; weighted
average, first-in-first-out, or last-in-first-out method. The publishing industry in Singapore has
been generally experiencing an upward swing in its sales.
Depreciation At the current moment, the kind of assets you have and expect to have are
like shelves, office equipment and a delivery van. You expect that in the next two months you
might be able to raise enough funds to buy a shop-house along Tanjong Pajar Road to open
the bookstore. You need to decide on the depreciation policy the company will adopt for the
assets. This should include the method of deprecation and associated estimates.
Sales and Accounts Receivables Part of your business model incorporates a loyalty
scheme that would allow customers on this scheme to place their orders on the Internet and
you would deliver to them. You need to decide when to recognize such revenues as delivery
might take place over a week and such customers will be allowed to pay on credit, as they
would have established their accounts with you for a long period.
Another issue pertaining to this area is the sales and accounts receivables to other bookstores.
Most of these sales to other bookstores will be on something close to a consignment sale.
Your other partners wonder if there is any way they can push these sort of sales to the actual
sales figures. You need to decide on the revenue recognition policy and any treatment
methods for the accounts receivables.
Required:
Present to your partners your proposed accounting policies for inventory,
depreciation and sales and accounts receivables.
Your discussion should pertain to:
1. Any alternative accounting policies on that that section. You do not
need to keep to the Singapore standards alone.
2. Your rationale for choosing one policy over the other.
3. Impact on financial statements as a result of such policies.
As a guide, you would probably want to write at least ONE PAGE for each
section (inventory, depreciation, sales and accounts receivable).

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(5 marks
per section)

ACCT101 Financial Accounting

Term 2 2001/2

Question 5 (15 marks)

The trial balance of Tracy Webmaster.com at 31 December 2001 before adjustments is given
below.
Tracy Webmaster.com
Unadjusted Trial Balance as at 31 December 2001
Cash
2,430
Accounts Receivable
44,130
Supplies
2,600
Prepaid Insurance
3,600
Equipment
48,300
Building
123,200
Acc. Depn. Building
24,640
Land
180,000
Accounts Payable
30,000
Unearned Web-based Revenue
9,700
Note Payable, long-term
84,000
Owners Capital
100,000
Retained Earnings
51,900
Web-based Revenue
135,080
Wages Expense
15,650
Interest Expense
4,900
Utilities Expense
3,800
Supplies Expense
6,710
435,320 435,320
There are the following events you need to pass adjusting entries for:
a. The company had a contract with Britney Spears to have her picture pop up every time
when someone surfs to the webpage (this is known as impressions). The agreement
was for $0.01 for every one time her picture pops up. As at 31 December she still
owes us money for 300,000 impressions and this has not been recorded. However, as
young pop stars are known to be quite immature at times (she herself admitted that she
is not a girl, but not yet a woman!), the company has decided to provide an allowance
of bad debt amounting to 30% of this portion of the accounts receivable.
b. The equipment that was bought on 1 July 2001 has a technical life of 4 years. Market
experts estimate that the equipment is only useful commercially for about 3 years. The
building has an estimated useful life of 10 years. The company has a policy to use
straight-line depreciation on all assets. The company also decided to fully insure the
equipment and this is reflected in the prepaid insurance account, effective from 1 July
2001 to 30 June 2004.
c. It was discovered that for the month of December you owe wages to two interns from
SMU. Their monthly wages per month is $500, subject to a 20% CPF employee
contribution and a 16% employer contribution.
d. The 5-year long-term note payable was obtained in July 1, 1999 from Al Cappuccino
(a local godfather) that incurs a 10% interest per annum payable on 31 July and 31
January every year.

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ACCT101 Financial Accounting

Term 2 2001/2

Required:
A. Propose the necessary adjusting entries as at 31 December 2001
B. Prepare a properly classified Income Statement
C. Prepare a properly classified Balance Sheet

(9 marks)
(3 marks)
(3 marks)

Question 6 (7 marks + 3 bonus marks)

Tow Keh Leong Pte Ltd (TKL), a registered trader under the GST Act, was incorporated in
Singapore operating as a manufacturer of household electrical equipment. TKL uses the
periodic inventory system to record its inventory and conducted its physical stock take on 30
December 2001. The total value of the inventory arising from the physical inventory count on
30 December 2001 amounted to $1,530,000. You may assume there were no movements in
inventory on 31 December 2001 except as indicated below.
TKLs net profit before tax for the year ended 2001 was $250,000 before taking into account
the following except as otherwise indicated:
1.

2.
3.

The company received $51,500 cash (inclusive of GST) for an urgent order of
merchandise from Hwang Gan Ltd, a new local customer, on 29 December to be
delivered by 31 December. The company had included this sale in computation of the
profit of $250,000 but due to unforeseen circumstances, the identified merchandise
costing $42,000 was delivered on 2 January 2002. The said merchandise was excluded
from the year-ends physical inventory count as it was marked Hold for shipping
instructions.
On 31 December 2001, TKL shipped merchandise costing $20,000 to a customer on
FOB shipping point terms at an invoice value of $31,000. This lot of merchandise was
included in the physical inventory for 2001.
Raw materials were received by TKL on 31 December 2001 at an invoiced value of
$45,000. Related transport costs amounted to $3,000, custom duty $2,000, GST of
$1,000. These costs were not taken up in the books.

Required:
A. Explain when should the TKL recognize the revenue from Hwang Gan
Ltd? State any assumptions that you make.
B. What should be the value of the inventory of TKL on 31 December 2001?
C. BONUS QUESTION: Taking into account the information given, recompute the profit of TKL for the year 2001 based on generally accepted
accounting principles.
End of Part A (70 marks)

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(3 marks)
(4 marks)
(3 marks)

ACCT101 Financial Accounting

Term 2 2001/2

PART B (15 Multiple-Choice Questions, 30 marks)

1.

Accrual accounting techniques are used to:

A. Recognize expenses that have not been recorded in the books
B. Record the anticipated effects of actions that may occur at a future date.
C. Report the results of actions whose monetary effects are difficult to estimate.
D. Assign revenues and expenses to the appropriate accounting period.
E. Allocate non-operating revenues and expenses to the appropriate business unit.

2.

Given the following information (taken from the records of Tellers Corporation for the
month ended December 31, 2001), what is the net income?
Advertising expense
$20,625
Accounts payable
13,450
Retained earnings (Dec 1, 2001) 57,860
Rent expense
11,728
A. $45,110
B. $35,310
C. $31,185
D. $11,385
E. None of the above

Income tax expense

Dividends paid
Consulting fees revenue
Supplies expense

13,095
14,125
93,550
16,917

3.

Under the allowance method for accounting for uncollectible accounts:

A. Losses from bad debts are recognized when defaults occur.
B. Estimated losses from potentially uncollectible debt are amortized over the life of
the obligation.
C. Loans to high-risk borrowers are recorded at a discount relative to their stated
principal amounts.
D. Losses from bad debts are estimated for the same period in which the corresponding
credit sales occur.
E. In accordance with the conservatism principle, customers who have not paid their
bills over 180 days should be written off as bad debts.

4.

At 1 July 2000, the allowance for doubtful debts account of LGT Ltd was $4,600. The
accountant of the company has calculated that the appropriate amount of allowance for
doubtful debt as at 30 June 2001 is $7,300 based on the aging method. Bad debt totaling
$3,200 were written off during the year and a previously written off debt of $1,700 were
recovered. The necessary general journal entry to bring the allowance for doubtful debts
to the appropriate amount on 30 June 2001 would be:
A. DR Bad Debt Expense $3,100
CR Accounts Receivable $3,100
B. DR Bad Debt Expense $4,200
CR Allowance for Bad Debts $4,200
C. DR Bad Debt Expense $5,900
CR Allowance for Bad Debts $5,900
D. DR Bad Debt Expense $4,200
CR Accounts Receivable $4,200
E. None of the above

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ACCT101 Financial Accounting

Term 2 2001/2

5.

In a period of rising prices, which of the following inventory methods generally results
in the lowest reported net income?
A. FIFO method.
B. LIFO method.
C. Average-cost method.
D. Specific-identification method.
E. All of the above

6.

If a companys ending inventory is understated by $3,000 and beginning inventory is

overstated by $5,000, the companys operating income will most likely be:
A. Overstated by $2,000.
B. Overstated by $8,000.
C. Understated by $2,000.
D. Understated by $8,000.
E. None of the above

7.

A company bought a truck on 1 January 2001 for $30,000. The truck has a five-year
estimated useful life and a $5,000 residual value, depreciated using the straight-line
method. Assuming that there is no other purchases or disposal of fixed assets, on 31 Dec
2003, the Truck account will show a balance of:
A. $16,000.
B. $18,000.
C. $20,000.
D. $21,000.
E. $30,000.

8.

If a company issued bonds at a discount, the discount is amortized over the life of the
bonds and:
A. Decreases the periodic interest payment below the interest expense charged.
B. Increases the periodic interest expense charged above the interest payment made.
C. Increases the periodic interest payment made above the interest expense charged.
D. Decreases the periodic interest expense charged below the interest payment made.
E. None of the above

9.

Which of the following is INCORRECT in respect of the statement of cash flows?

A. It provides information about an entitys cash receipts and payments over a period
of time
B. It provides details as to how the cash account changed during a period
C. It includes transactions that are not already reflected in the balance sheet and
income statement
D. It highlights changes in managerial strategy regarding investments and finances
E. None of the above (i.e. all statements above are correct)

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ACCT101 Financial Accounting

Term 2 2001/2

10. For purposes of determining the amount of a capital expenditure, the acquisition cost of
equipment would NOT include:
A. Transportation cost.
B. Insurance cost during transit.
C. Cost of testing equipment during installation.
D. Repair cost of damage incurred during installation.
E. All of the above are included in the acquisition cost.
11. Wallaby Inc. has two stocks: preference stock (6%, $10 par, 45,000 shares authorized,
10,000 shares issued) and common stock ($7 par, 250,000 shares authorized, 120,000
shares issued). Assume that there is no tax. If Wallaby pays a $64,000 dividend, and if
the preferred stock is cumulative and two years dividends are in arrears, common
stockholders will receive:
A. $32,000
B. $52,000
C. $58,000
D. $46,000
E. None of the above
12. Which one of the following errors causes net income to be overstated?
A. Failure to provide for allowance for bad debts
B. Failure to record collection of an account receivable
C. Failure to record customer deposits for services to be performed next year
D. Failure to adjust a prepaid expense previously recorded as expenses
E. Failure to record an accrued revenue adjusting entry
13. A direct purchase of property through the issuance of shares:
A. Will be shown as an investing outflow and a financing outflow
B. Will be shown as an investing inflow and a financing inflow
C. Will be shown as an investing outflow and a financing inflow
D. Will be shown as an investing inflow and a financing outflow
E. Will not be shown in either the investing nor financing sections
14. Which of the following is NOT usually disclosed as a note to the accounts?
A. Revenue recognition policies
B. Additional information about the summary totals
C. Contingent Liabilities
D. Accounts that have been highlighted as suspicious by the auditors
E. None of the above, i.e. all can be disclosed as a note to the account

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ACCT101 Financial Accounting

Term 2 2001/2

15. Rios inventory records in October shows that it has 200 opening inventory balance at $5
each. It made 4 lots of purchases: 150 units on Oct 5 at $6 each, 250 units on Oct 10 at
$5.75 each, 180 units on Oct 24 at $6.20 each and 100 units on Oct 27 at $6.10 each.
Sales were as follows: 175 units on Oct 8, 225 units on Oct 15, and 300 units on Oct 28.
What is the cost of goods sold for the month of Oct if periodic average cost inventory
method is employed?
A. $3,957.50
B. $4,027.84
C. $4,159.75
D. $4,163.50
E. None of the above

End of Part B (30 marks)

END OF ACCT101 Financial Accounting Term 2 2001/2002 Examination

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