Marking Guide 2002/2003 Term 2 ACT101 FA Exam

Question 1 (30 marks)

Question 1A (4 marks):

Depreciation Expense = 2nd year reducing balance + half a year new equipment SL = 125 + 20 = 145
Bad Debt Expense = Begin Allowance was 6, write-off was 20, desired ending is 10, so Bad Debt
Expense = 24
Question 1B (8 marks):
A properly classified B/S is required. This would include proper headings, classification into current and non-current, clear
indication of gross versus net (long term assets, debtors). I will leave it to your discretion on how to mark this question,
workings provided below.

Cash at bank
Accounts Receivable
Allowance for DD
Inventory
Equipment
Acc. Depn Equipment
Total Assets
Accounts Payable
Accrued Expenses
Tax Payable
Debentures (5%)
Capital
Retained Earnings
Total Liab & OE

Workings
125+(20%x1500)+1100-(90%x800)-250-420-25
120+(80%x1500)-1100-20
5% of 200
194+800-768
500+250
250+145 from part a

80+(10%x800)
70 (420-220-128-15-30)

103 + 160 profit 25 dividends

Question 1C (5 marks): Basic numbers below, but requires a proper format and headings etc.
Net income
Dep exp
AR
INV
AP
Accrued exp
Tax payable

160
+145
-76
-32
+80
-27
+10

260

CFO

New assets

-250

-250

CFI

-25

-25
-15

CFF
NCF

Dividend Paid

110
200
(10)
226
750
(395)
881
160
43
40
300
100
238
881

Question 1D (8 marks): Basic numbers below as per textbook formulas (feel free to tolerate a little bit), but students are
required to explain the ratio.

(1) Current Ratio = CA / CL = 526 / 243 = 2.16

(2) A/R Turnover = Credit Sales / Average net A/R = 1200 / 152 = 7.9 times
(3) Times Interest Earned = Operating income / interest exp = 215 / 15 = 14.33 times
(4) Earnings per Share = NI / Shares outstanding = 160,000 / 50,000 = $3.2 per share
Question 1E (5 marks):

Usefulness: Expressing a financial statement item as a percentage of another item allows

comparibility across firms of different size. Financial ratios can also throw light on a companys
profitability, liquidity, ability to manage its inventory and accounts receivable and its level of risk
(students may give a few examples). Comparing various financial ratios with benchmark measures
such as industry average or competitor ratios id helping in showing how the company performs
relative to the industry or its competitors.
Limitations: A number of limitations may be mentioned: historical costs, subject to accounting
policy choice, management estimates, lack of benchmarks, ratios tell you the symptoms and not the
cure, etc

Question 2 (4 x 3 = 12 marks)
a. Possible Issue: Revenue vs Capital Expenditure, Long Term Assets
As the refurbishment, furniture and fittings can be expected to last more than one financial year, it
should be recorded as an asset and depreciated accordingly. Whether it is a success or not is
irrelevant as all business endeavours have some risks.
b. Main Issue: Entitys Concept, Materiality, Internal Control, Fraud
Regardless of materiality, auditors have a duty to detect fraud.
c. Main Issue: Consistency, Comparability and Earnings Management
Change of accounting assumptions is permitted as long as it is properly disclosed and summary
impact of such changes are disclosed (or restatement)
d. Main Issue: Contingent Liability, Disclosure
The hotel should assess the likelihood of such law suits. If it is highly probable, an estimate of
liability is required and provided for. If it is reasonably possible, a contingent liability should be
disclosed in the notes of to the accounts. No disclosure is necessary if it believes that the lawsuits
are unlikely to succeed.

Question 3 (6 + 4 = 10 marks)
A. Total units of goods sold = 300+1300+150+1350 = 3100
Total units available for sale = 4200
Total goods available for sale = 1400x19+600x20+900x21+500x22+800x23
= 26600+12000+18900+11000+18400 = 86900
(a)

FIFO Ending Inv = 800x23+300x22= 25000

FIFO COGS = 86900-25000 = $61,900 [2 marks]

(b)

Cost per unit = 86900/4200 = 20.69

Weighted average COGS = 3100 x 20.69 = $64,140 [2 marks]

(c)

LIFO Ending Inv = 1100x19=20900

LIFO COGS = 86900-20900 = $66,000 [2 marks]

B. First identify prices are increasing throughout the year

Method depends on managements motivation. If save tax, choose LIFO which will result in lowest
income and hence less tax. If boost income, choose FIFO which will result in highest income. If want
to spread out cost evenly across the year which is hence more fair, choose weighted average.

Question 4 (6 + 6 + 6 = 18 marks)
A. Issuance price = 1000000x0.6756+(1000000x0.05)x8.1109=675600+405545 = $1,081,145
Interest expense for 2003 = 0.04x1081145 = 43,246
[3 marks] 1 Jan : Dr Cash

1081145
Cr Bond Payable
1000000
Cr Premium on Bonds Payable 81145
[3 marks] 31 Dec: Dr Interest Expense
21623
Dr Interest Payable
21623 [interest exp may be combined as $43,246]
Dr Premium on B/P
6754
Cr Cash
50000
B. Criteria for recognition as capital lease: Transfer option, bargain purchase option, lease life>75%
useful life, PV of lease payment >= 90% of FMV [2 marks]
PV of lease payments=10000x4.3295=43295, which is > 90% 45000 (40500). Hence, capital lease.
(The calculation of Lease assets and liab will not be covered in the exam.)
[2 marks] 1 July 03:
[2 marks] 30 Jun 04:

Dr Leased Asset
43295
Cr Lease Liability
43295
Dr Lease Int. Exp
2165
Dr Lease Liability
7835
Cr Cash
10000

C. Carry value of bond after 1st yr = 1081145-6754=1074391

Interest Expense for 2nd yr = 0.04x1074391=42976
Interest Expense accrued for 2004 = 42976/2 = 21488
Premium amortization for 2004 = 25000-21488=3512
Current Liability
Interest Payable
25,000
Long-term Liability
Bond Payable
1000000
Add: Premium on Bonds Payable 70879
Carrying value of bond
1070879
Lease Liability
35460

[2 marks]

[2 marks]
[2 marks]

[Bonus 2 marks if students split the lease liability into current and non-current portion of $8227 and $27233]

Question 5 (5 BONUS marks)

State revenue recognition principle: Revenue is recognized when there is substantial completion of
work and cash has been received or can reasonably be expected to be received.
More aggressive policy: Recognize revenue when order is placed. In such a case, have to argue that
work has been substantially completed at point when order is placed and delivery of goods forms an
insignificant part of the whole earning process. Also, have to ensure that from past experience or
history, the percentage of customers who defaults eventually is not significant.
More conservative policy: Recognize revenue upon receipt of payment. In this case, have to argue that
the collection of cash from customer forms a significant part of the whole earning process. Work is
deemed to be substantially completed when cash is collected and hence there is no further risk to the
seller. This may be possible if from past experience or history, the percentage of customers who
defaults are significant. Hence, it would be prudent to recognize revenue upon receipt of payment.
Part B MCQ:

DBEAD DDACC DBEAE