ACCT101

TERM 1 2003-04 EXAMINATION

NOVEMBER 2003

ACCT101 Financial Accounting

INSTRUCTIONS TO STUDENTS

The time allowed for this examination paper is 3 hours.

This paper consists of two parts, Part A and Part B, printed on a total of 8 pages (for a
total of 100 marks). PLEASE CHECK BEFORE COMMENCING. This is a FINAL
paper.

Part A consists of 4 questions (70 marks). You are to answer ALL questions and show
ALL relevant calculations when appropriate.

Part B consists of 15 Multiple Choice Questions (30 marks). Please write your
answers to Part B on the FIRST page of your answer booklet. Each correct answer
is worth 2 marks and a penalty of marks will be applied to any incorrect answer.

ACCT101

PART A (4 questions, total 70 marks)

Question 1 (5 + 4 + 6 + 6 + 4 = 25 marks)
MISO Pte Ltd is a company that produces lifestyle products such as massage chairs, air
purifiers, etc. After years of researching, MISOs R&D department has perfected a neck
massager, Strangler. On April 1, 20X2, MISO signed a non-cancelable agreement and
commissioned an engineering company to produce special equipment for the production of
Strangler. The machine costs MISO $1,000,000 and was delivered (and paid in cash!) on
August 1, 20X2. In addition, the installation procedures and additional insurance for the
transportation and installation cost MISO an additional $10,000. This equipment is expected
to last 8 years with $100,000 residual value and in accordance with company policies, the
depreciation method used is Double Declining Balance.
In order to finance this new product, MISO has the choice of obtaining funds from
shareholders or from bonds. After much deliberation, the board of directors decided to issue
bonds. 1,000 10-year bonds with a par value of $1,000 and coupon rate of 6% were issued at
a price of $864,097 on July 1, 20X2. At the time of issuance the market rate was 8%. To
make the bonds attractive to investors, MISO promises to pay half-yearly payments on
January 1 and July 1 every year, with the first payment due in January 1, 20X3.
Towards the end of 20X2, a customer suffered severe injury while using Strangler.
Fortunately, the customer survived. The customers hospital bill amounted to $30,000 and
she continued to incur acupuncture and physiotherapy expenses after being released from the
hospital. She is suing MISO for $50,000 medical expenses, $200,000 for loss of partial
income (she has to take time-off work twice a week for treatment), plus an additional
$100,000 for emotional damages. MISOs legal counsels have advised that the chance of the
customer winning the case and being awarded the full damages is 1 in 100, on the basis that
she has used Strangler excessively, without heeding the warnings on the products box and
instructions leaflets. However, as a presiding judge may be sympathetic to her plight, it is
very probable that she will be awarded the medical and MISO will bear the total legal costs
(estimated to be $300,000).
Interest
Periods
FV
PV
FVA
PVA

3%
10
20
1.3439
1.8061
0.7441
0.5537
11.4639
26.8704
8.5302
14.8775

4%
10
20
1.4802
2.1911
0.6756
0.4564
12.0061 29.7781
8.1109 13.5903

6%
10
20
1.7908
3.2071
0.5584
0.3118
13.1808 36.7856
7.3601 11.4699

8%
10
2.1589
0.4632
14.4866
6.7101

20
4.661
0.2145
45.762
9.8181

Required:
a.
Prepare the necessary journal entries for (1) the commissioning of the equipment (2)
delivery of the equipment and (3) the depreciation journal entry for the financial year
ended 31 December 20X2.
b.
Explain how the choice of depreciation method will impact MISOs bottom line.
Illustrate your arguments with examples.
c.
Outline the advantages and disadvantages of raising funds from (1) debt providers and
(2) shareholders.
d.
Prepare the necessary journal entry for the issuance of the bonds on July 1, 20X2 and
the required adjusting entry on December 31, 20X2.
e.
Discuss the appropriate accounting treatment for the lawsuit.

ACCT101

Question 2 (10 + 5 = 15 marks)

When COBC announced that Robinsons is up for sale, your very very very rich uncle, Oei
Heong Long gave you a call and asked if you would help him evaluate the financial position
and performance of Robinsons within fifteen minutes. You explained to him that proper
financial analysis can not be done in a rush but your uncle was worried that he will miss out
on a bargain if you take too long. Just punch up some of those accounting ratios for me and
tell me what they mean! Quick!, he said.

Balance Sheet
as at 30 June 2002

Income Statement
for the year ended 30 June 2002

Required:
a.
Calculate the following ratios for the latest financial year and interpret the ratios for
your uncle: (1) Current Ratio (2) Debtors Turnover (A/R turnover) (3) Gross Profit
Margin (4) Asset Turnover and (5) Times Interest Earned. Remember you will need to
explain the ratio, not just saying how the ratio is calculated.
b.

After explaining the five ratios above to your uncle, explain to him the limitations of
financial statement analysis AND suggest ways on how you can improve your analysis
of Robinson, if you are given additional time to do a more thorough and meaningful
analysis.
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ACCT101

Question 3 (6 + 5 + 4 = 15 marks)
a.

The extracts of GoAmigo Ltds Annual Report shows that it has issued new shares and
bought back some shares during the year.
Statement of Changes in Equity extract:

Share Premium Reserve (2001 = $93,190,000 and 2002 = $107,738,000). The

difference is solely attributed to the issuance of new shares.
Note 3: Share Capital
Movements during the year were:
Opening Balance
Cancellation of 1,191,000 ordinary shares of $1 each
Issue of 1,244,000 ordinary shares of $1 each
Closing balance

2002
369,644,000
(1,191,000)
1,244,000
369,697,000

Note 4: Share buy back

Under the share buy back scheme mandated by shareholders, the company
purchased 1,191,000 ordinary shares of $1 each at an average price of $17.94 per
share, amounting to a total cost, including brokerage, of $21,360,000. The
repurchase transactions were financed by internally generated funds. The amounts
were adjusted against the companys share capital and retained profits accounts.
Required: Propose the aggregate journal entries for the two transactions.

b.

In the process of completing bank reconciliation, the account clerk of Barbossa Ltd
noted that the bank statement balance was $21,212 but the ledger account shows a
balance of $12,121.
Required: Provide five possible reasons/items why the two figures do not tally and
how you would go about reconciling these reasons/items (eg: X is added to bank
statement balance, Y is deducted from ledger balance).

c.

Suppose KarFur Store ended May 20X4 with 800,000 units of merchandise that costs
an average of $7 each. KarFur uses the periodic inventory system. Suppose the store
then sold 600,000 units of merchandise for $4.9 million during June 20X4. Further,
assume that the store made two large purchases during June: 100,000 units @ $6 on
June 6 and 400,000 units @ $5 on June 21.
Required: At June 30, the store manager needs to know the stores gross profit under
both FIFO and LIFO. Provide this information.

ACCT101

Question 4 (3 + 12 = 15 marks)
The comparative Balance Sheet of Northern Bell Company at March 31, 20X9 reported the
following:

Cash and cash equivalents

Accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued liabilities
Income tax payable

$
$
$
$
$
$
$

March 31
20X9
20X8
19,900 $
4,000
14,900 $
21,700
63,200 $
60,600
1,900 $
1,700
30,300 $
27,600
10,700 $
11,100
8,000 $
4,700

Northern Bells transactions during the year ended March 31, 20X9, included the following:
Acquisition of land by issuing note payable ............................$76,000
Amortisation expense...................................................................2,000
Payment of cash dividends.........................................................30,000
Cash acquisition of equipment...................................................78,700
Issuance of long-term note payable (to borrow cash)................50,000
Sale of long-term investments ...................................................13,700
Depreciation expense .................................................................15,300
Cash acquisition of building ......................................................47,000
Net income .................................................................................70,000
Issuance of common stock for cash ..........................................11,000
Stock Dividends .........................................................................18,000
Required:
a. Explain the concept of cash equivalents and provide examples of what would be normally
included as cash equivalent.
b. Prepare the 20X9 Cash Flow Statement for Northern Bell, including cash reconciliation
and any other relevant disclosures.

End of Part A (70 marks)

ACCT101

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

1.

The primary purpose of accounting standards is to help

A. Investors in identifying good and safe investments
B. Accountants in preparing reliable and understandable financial reports
C. Management in weeding out incompetent accountants
D. Auditors in detecting large scale management fraud
E. All of the above

2.

Which of the following pairs of journal entry cannot occur?

A. Increase in assets; increase in revenue
B. Increase in expense; decrease in assets
C. Increase in expense; decrease in equity
D. Decrease in assets; decrease in liabilities
E. Decrease in assets; decrease in equity

3.

Tom paid his creditor $10,000. The amount was wrongly recorded as a debit to Expense
$10,000 and a credit to Cash $10,000. The adjusting entry to correct this error is:
A. A debit to Account Payable $10,000 and a credit to Expense $10,000
B. A debit to Account Payable $10,000 and a credit to Cash $10,000
C. A debit to Cash $10,000 and a credit to Expense $10,000
D. A debit to Expense $10,000 and a credit to Account Payable $10,000
E. None of the above

4.

Treating a revenue expenditure as a capital expenditure:

A. Understates expenses and overstates owners equity
B. Understates expenses and understates assets
C. Overstates expenses and understates net income
D. Overstates assets and understates owners equity
E. Overstates assets and overstates revenue

5.

The assets and liabilities of Orange Limited are as shown below:

Assets
Liabilities
As at January 1, 20X2
$100,000
$40,000
As at December 31, 20X2
$140,000
$30,000
Assuming shareholders contributed an additional capital of $20,000 in January 2002 and
the company paid a dividend of $10,000 in December 2002, what was the net income of
the company for the year 2002?
A. $70,000 Profit
B. $60,000 Profit
C. $50,000 Profit
D. $40,000 Profit
E. None of the above
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ACCT101
6.

What is the effect on a companys balance sheet equation when an amortization expense
is recognized?
A. There will be no change in the total assets, liabilities and owners equity
B. This transaction affects only the income statement, so no change on the balance
sheet will occur
C. Total asset will increase and total profit will decrease by the same amount
D. Without knowing the exact dollar amount of amortization, the effect on the balance
sheet cannot be determined
E. None of the above

7.

Which of the following is not an objective of internal control?

A. Measures to safeguard assets
B. Measures to promote operational efficiency
C. Measures to detect and prevent frauds
D. Measures to ensure accurate and reliable accounts records
E. None of the above (i.e. all of the above are objectives of internal control)

8.

Under the allowance method for estimating uncollectible accounts, the entry to write off
an account:
A. reduces total assets
B. increases total assets
C. reduces net income
D. increases net income
E. has no effect on total assets

9.

Mitchell & Frank Incorporated uses the percentage-of-sales method to estimate

uncollectibles. Net credit sales for the current year amount to $1,000,000 and
management estimates 3% will be uncollectible. Allowance for Doubtful Accounts prior
to adjustment has a debit balance of $1,900. The amount of expense reported on the
income statement will be:
A. $31,900
B. $30,000
C. $28,100
D. $1,900
E. None of the above

10. An error in the ending inventory for the year ended 31 December 2002:
A. affects only the 2002 financial statements
B. has no effect on the 2002 financial statements but will create an error in the 2003
financial statements
C. automatically creates errors in the ending inventory balance in 2002 and 2003
D. automatically creates errors in cost of goods in 2002 and 2003
E. none of the above

ACCT101
11. Maxim Limited used accrual accounting. For the year ended 31 Dec 2002, the company
reported $35,000 in salary expense on its Income Statement. The comparative Balance
Sheets stated that salary payable as at 31 Dec 2001 was $1,000 and $2,500 as at 31 Dec
2002. How much did the company pay for salary during the year 2002?
A. $31,500
B. $33,500
C. $35,000
D. $36,500
E. $38,500
12. Recoding depreciation of long-term assets at each accounting period is an attempt to:
A. match the cost of a plant asset with the revenue it generates
B. record the annual decline in the value of assets
C. measure the fair market value of plant asset
D. match the expected loss of productive life as the years pass
E. None of the above
13. The depreciation expense on a particular machine was $5,000 for the 3rd year and
$10,500 in the 4th year. The most logical explanation for this is:
A. Heavy repair costs were incurred in year 4
B. The company decided to de-accelerate its depreciation method
C. Units of production method of depreciation was used
D. The estimated useful life was increased in year 4
E. A balancing charge of depreciation on the last year of assets live (DDB method)
14. The liability on bonds issued at a discount is calculated by:
A. subtracting unamortized discount from bonds payable
B. subtracting the sum of amortized discount from bonds payable
C. subtracting interest expense from bonds payable
D. subtracting amount paid for stated interest from bonds payable
E. No calculation is needed, the liability will be equal to the bonds face value
15. Under the effective-interest method of amortizing bond premium, the interest expense
for each interest payment period:
A. is equal to the carrying value of the bond multiplied by the effective rate of interest
B. is equal to the carrying value of the bond multiplied by the stated rate of interest
C. is equal to the face value of the bond multiplied by the stated rate of interest
D. is equal to the face value of the bond multiplied by the effective rate of interest
E. None of the above
End of Part B (30 marks)

END OF ACCT101 Financial Accounting Term 1 2003/2004 Examination

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