We removed the SMU Logo to facilitate faster downloading. FYI please.

TERM 1 2000-01 EXAMINATION DEGREE OF BACHELOR OF BUSINESS MANAGEMENT NOVEMBER 2000

ACCT101 FINANCIAL ACCOUNTING

INSTRUCTIONS TO STUDENTS 1 2 3 4 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.

-1-

ACCT101 Question 1 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

-2-

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 nonoperating 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

-3-

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. Loss on disposal of $12,000 Loss on disposal of $ 6,000 Loss on disposal of $66,000 Loss on disposal of $20,000 a 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

a) b) c) d)

-4-

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 1998 Audited 225,000 85,000 100,000 36,000 18,600 15,000 6,000 2,400 4,000 310,000

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

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)

-5-

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 $350,000 400,000 $750,000

Inventory stored at the warehouse, at cost Total

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

-6-

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 year-end. (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

-7-

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 Non Current Assets Leasehold buildings, at cost Less Accumulated depreciation Equipment, at coat Less Accumulated depreciation Shares in GLC Limited, at cost Total Assets Current liabilities Accounts payable Dividends payable Income tax payable Long term liabilities Mortgage payable Owners equity Share capital ($1 par value) Share premium Retained earnings Total Liabilities and Owners Equity 436 390 450 520 1,796 1,350 (675) 600 (350) 330 1,255 $3,051 560 178 456 1,194 350 1,200 220 87 1,507 $3,051

-8-

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 Change in retained earnings Add retained earnings of previous years Total retained earnings at 31 December 1999 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. $000 8,000 4,500 3,500 1,120 309 125 250 6 24

1,554 1,946

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

118 237

-9-

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

- 10 -

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

9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356

10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319

11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286

12% 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% 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

8% 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% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161

10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814

11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492

12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194

- 11 -