ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 1 Bank Reconciliation ASB Ltd. received its bank statement for the month ending 30 June, and reconciled the statement balance to the 30 June balance in the Cash account. The reconciled balance was determined to be $4800. The reconciliation recognised the following items: 1. Deposits in transit were $2100. 2. Outstanding cheques totalled $3000. 3. Bank service charges shown as a deduction on the bank statement were $50. 4. An NSF cheque from a customer for $400 was included with the bank statement. The firm had not been previously notified that the cheque had been returned non-sufficient funds (NSF). 5. In dealing with the review of cheques that have been paid out, there was a cheque actually written for $890, which has been mistakenly recorded as a disbursement of $980. Part A: What was the balance in ASB Ltds cash account before recognising any of the above reconciling items? (Show all the necessary steps.) Solution approach: Set up a bank reconciliation in the usual format, enter the known information, and then work backwards to solve for the beginning balances in the companys Cash account and on the bank statement. Indicated balance (per books) Add: Cheque recording error Less: NSF cheque Bank service charge Reconciled balance Balance per Cash account before reconciliation = $4 800 90 + 400 + 50 = $5 160 Key: Solve for the unadjusted cash account balance as the missing item given the reconciled balance and, reconciling items. Part B: What was the balance shown on the bank statement before recognising any of the above reconciling items? (Show all the necessary steps.) Indicated balance (per bank) Less: Outstanding cheques Add: Deposits in transit Reconciled balance $ 5700 (3 000) 2 100 $4 800 $ 5160 90 (400) (50) $4 800

Again, solve the bank statement balance as the missing item given the reconciled balance and reconciling items. Balance per bank before reconciliation = $4 800 2 100 + 3000 = $5 700 Part C: Prepare any necessary adjusting journal entries. Debit Bank charges (Interest expense) Cash Accounts Receivable Cash Cash Miscellaneous Expense 50 50 400 400 90 90 Credit

ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 2 ACCOUNTS RECEIVABLES On 1st July, 2007, one of SSSs customers, BBB, went bankrupt. BBB owes SSS $2,500 and there is no hope for recovering this amount. On 1st October 2007, SSS collected $85,000 from outstanding accounts. SSS Companys financial year ends on 31st December. During the year to 31 December 2007, SSS sold goods for cash for $22,000, and on credit for $80,000. On 1st January 2007, SSS Ltd. has a debit balance of $30,000 in Accounts Receivable and a credit balance of $ 4,500 in the Allowance for Doubtful Debts.

Required: Part A (i) If bad debts expense for 2007 is recognised based on 2% of credit sales, prepare the entry to record bad debts expense. Debit Credit Bad debts expense [2%*$80,000] Allowance for doubtful debts $1,600 1,600

(ii) Calculate the net accounts receivable after recognising the bad debts expense..

Accounts receivable: $30,000+$80,000-$85,000-$2,500=$22,500 Allowance for doubtful debts: $4,500+$1,600-$2,500=$3,600 Net accounts receivable= $22,500-$3,600=$18,900
Net A/R = = = A/R 22,500 18,900 Accounts Receivable
1-Jan-07 o/b Sales 30,000 80,000 1-Oct-07 1-Jul-07 31-Dec-07 110,000 1-Jan-08 o/b 22,500 Cash ADD c/b 85,000 2,500 22,500 110,000

ADD 3,600

Allowance for Doubtful Debts

1-Jul-07 31-Dec-07 A/R c/b 2,500 3,600 6,100 1-Jan-08 o/b 1-Jan-07 31-Dec-07 o/b BDE 4,500 1,600 6,100

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ACCT1501 Practice Exam Questions & Solutions

2012S1

Part B (i) Assume bad debts expense is determined as an adjusting entry at year end. If uncollectible accounts are estimated to be $3,200 from aging receivables, prepare the adjusting entry on the 31st December to record bad debts expense. Debit Bad debts expense [$4,500 - 2,500+X=3,200] Allowance for doubtful debts $1,200 $1,200 Credit

(ii) Calculate the net accounts receivable after the adjusting entry. Accounts receivable: $30,000+$80,000-$85,000-$2,500=$22,500 Allowance for doubtful debts: $3,200 Net accounts receivable= $22,500-$3,200=$19,300

Allowance for Doubtful Debts

1-Jul-07 31-Dec-07 A/R c/b 2,500 3,200 5,700 1-Jan-08 o/b 1-Jan-07 31-Dec-07 o/b BDE 4,500 1,200 5,700 3,200

ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 3 (12 Marks)

Inventory

The following information is taken from the accounting records of Eden Ltd for the year ended 31 December 2010.

Jan 1 Mar 10 Jun 25 Aug 30 Oct 5 Nov 26 Dec 31

Inventory Purchases Sales Purchases Sales Purchases Sales

Units 2,000 2,200 1,800 1,800 2,500 3,000 2,000

Purchase price/unit $56 $55 $52

Selling price/unit

$60 $65 $50 $63

Part A: Assume Eden uses the first-in-first-out method of allocating cost to inventories. Determine the cost of ending inventory as at 31 December 2010 and the cost of goods sold and gross profit for the year ended 31 December 2010, assuming: a) Perpetual Inventory System [6 marks]

COGS =1,800*56+(200*56+2,200*55+100*52)+(1,700*52+300*50)= 341,600 Ending inventory=2,700*50 = $135,000 Gross profit Sales=1,800*60+2,500*65+2,000*63=396,500 COGS=341,600 Gross profit=54,900

2 marks for COGS and ending inventory 1 mark for sales 1 mark for gross profit

DO NOT WRITE BEYOND THIS LINE

ACCT1501 Practice Exam Questions & Solutions

2012S1

b)

Periodic Inventory System [6 marks]

Opening inventory = 2,000*56 = 112,000 Purchases = 2,200*55 + 1,800*52 + 3,000*50 =364,600 Closing Inventory = 2,700*50 = 135,000 COGS = Opening inventory + Purchases Closing inventory = 112,000 + 364,600 135,000 = 341,600 Ending inventory=2,700*50 = $135,000 Gross profit Sales=1,800*60+2,500*65+2,000*63=396,500 COGS=341,600 Gross profit=54,900 2 marks for COGS and ending inventory 1 mark for sales 1 mark for gross profit

ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 4 (10 Marks) DEPRECIATION Latte On Demand purchased a coffee drink machine on 1 January, 2009, for $44,000. Expected useful life is 10 years. Residual value is $4,000. Under two depreciation methods, annual depreciation and total accumulated depreciation at the end of 2009 and 2010 are as follows: Method A Method B Annual Accumulated Annual Accumulated Depreciation Depreciation Depreciation Depreciation Expense Expense Year 2009 $8,800 $8,800 $4,000 $4,000 2010 7,040 15,840 4,000 8,000 Required: 1. Identify the depreciation method and rate used in each instance. (2 marks) Method A: Method B: Reducing Balance method 20% Straight-Line method 10% (1 mark) (1 mark)

2. Assume use of the same method through 2011. Compute depreciation expense for 2011, accumulated depreciation, and asset book value (carrying amount) at the end of 2011. (6 marks) Method A: Depreciation rate=$8,800/$44,000=20% Depreciation expense for 2011= 20% *($44,000-$15,840)=20% * $28,160=$5,632 Accumulated depreciation=$15,840+$5,632=$21,472 Book value=$44,000-$21,472=$22,528 (1 mark for each, no penalty for carry-on errors)

ACCT1501 Practice Exam Questions & Solutions

2012S1

Method B: Depreciation expense=($44,000-4,000)/10=$4,000 Depreciation expense for 2011= $4,000 Accumulated depreciation=$8,000+$4,000=$12,000 Book value=$44,000-$12,000=$32,000 (1 mark for each, no penalty for carry-on errors)

3. Prepare a journal entry to record the depreciation for 2011 under Method B. (2 marks) Debit Credit

Depreciation expense Accumulated depreciation (1 mark for each line, no penalty for carry-on errors)

4,000 4,000

ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 5 (16 marks)

Financial Statement Analysis

SUC limited is constantly profitable. SUC Limiteds financial statement relationships are as follows: Profit Margin Asset Turnover Current Ratio Debt to Equity Ratio Earnings per Share 7% 1.5 times 2 times 0.5 times $0.15

For each of the following transactions or events, indicate the directional effect (increase, decrease, no change) on the Asset Turnover, Current Ratio, Debt to Equity Ratio, and Earnings Per Share. Note that you must write either increase, decrease, or no change. A blank response will be marked as incorrect. a. Switched to LIFO from FIFO for inventory valuation in a period of increasing prices. (4 marks) b. Ordinary shares are issued for $175 000. (4 marks)

c. Switched to the reducing balance depreciation method from the straight-line depreciation method for machinery acquired two years ago (i.e. this is the second year in which the depreciation is recorded). This machinery was expected to last for 5 years with no residual value. (4 marks) d. A machine costing $80 000, on which $60 000 of depreciation was charged, is sold for $20 000. (4 marks) Record your answer in the table below. Asset Turnover Increase Decrease Increase No change Current Ratio Decrease Increase No change Increase Debt to Equity Ratio Increase Decrease Increase No change Earnings Per Share Decrease Decrease Decrease No change

Transaction a b c d

PLEASE NOTE THAT THERE IS A LIST OF RATIO FORMULAE PROVIDED ON THE FOLLOWING PAGE.

ACCT1501 Practice Exam Questions & Solutions

2012S1

RATIO FORMULAE
Return on Equity Operating Profit after Tax Shareholders' Equity Cash from Operations Operating Profit after Tax Earnings Before Interest and Tax Total Assets Total Assets Total Shareholders Equity Cash From Operations Total Assets Current Assets Current Liabilities Current Assets - Inventory Current Liabilities Annual Dividends Declared per Share Earnings per Share Operating Profit after Tax Sales Sales Total Assets Earnings before Interest and Tax Interest Expense Total Liabilities Total Shareholders' Equity Average Inventory COGS Average Trade Debtors Credit Sales x 365

Quality of Earnings Ratio

Return on Assets

Leverage Ratio

Cash Flow to Total Assets

Current Ratio

Quick Ratio

Dividend Payout Ratio

Profit Margin

Total Asset Turnover

Interest Coverage Ratio

Debt to Equity Ratio

Days in Inventory

Days in Debtors Price/Earnings Ratio

x 365

Current market price per share Earnings per Share Operating profit after tax preference share dividends Weighted Average Number of Ordinary Shares Outstanding

Earnings Per Share

ACCT1501 Practice Exam Questions & Solutions

2012S1

QUESTION 6 (20 Marks) ADJUSTING ENTRIES AND FINANCIAL STATEMENTS The following pre-adjusted trial balance has been prepared for Dog Company as at 30 June 2010 (for the 12 months beginning on 1 July 2009): DR Cash at Bank Accounts Receivable Allowance for Doubtful Debts Inventory Prepaid Rent Property, Plant and Equipment Accumulated Depreciation - PPE Accounts Payable Bank loan Contributed Capital Retained Profit at 1 July 2009 Sales Cost of Goods Sold Interest Expense Wages Expenses Rent Expense 265,000 5,000 80,000 5,000 1,115,000 1,115,000 100,000 10,000 450,000 200,000 60,000 50,000 310,000 34,000 450,000 200,000 1,000 CR 10,000

The following information is given which may give rise to year end adjustments: Depreciation on Property, Plant and Equipment is provided for on a straight line basis at 10% per annum. The balance in Prepaid Rent relates to the 12 month period from 1 January 2010 to 31 December 2010. An ageing analysis shows that $4,000 of Accounts Receivable is estimated to be uncollectible. On 30 June 2010, the directors declared a dividend of $5,000, which the shareholders authorised. The dividend is to be paid on 15 September 2010.

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ACCT1501 Practice Exam Questions & Solutions

2012S1

It is discovered that $10,000 cash received during the year and credited to sales are actually related to services to be delivered in July 2010. $5,000 of wages relating to June 2010 have not been paid and need to be accrued. Part A (11 Marks) Prepare journal entries for the necessary end of period adjustments. Debit Depreciation Expense PPE Accumulated Depreciation PPE (1 mark for each entry) Rent Expense Prepaid Rent (1 mark for each entry) Bad Debts Expense Allowance for doubtful debts (1 mark for each entry) Retained Profits Dividend Payable (1 mark for each entry) Sales Unearned revenue (1 mark for each entry) Wages Expense Wages Payable (1/2 mark for each entry) 5,000 5,000 45 000 45 000 Credit

5 000 5 000

3 000 3 000

5 000 5 000

10,000 10,000

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ACCT1501 Practice Exam Questions & Solutions

2012S1

Part B (6 Marks) Prepare an Income Statement for the year ended 30 June 2010: Dog Company Income Statement for year ended 30 June 2010 Sales (1 mark) Less COGS ( 1 mark if COGS is in correct place) Gross Profit Less Operating Expenses Interest expense Depreciation expense (1 mark) Rent expense (1 mark) Bad debts expense (1 mark) Wages expense (1 mark) Net Profit 440 000 265 000 175 000

5 000 45 000 10 000 3 000 85 000

148 000 $27 000

Part C (3 Marks) In the Balance Sheet as at 30 June 2010 (show all workings): i. What would be the closing balance of retained profits?

Opening Balance Plus Profit for Period Less Dividends declared Closing Balance

34 000 (1 mark) 27 000 (1 mark) 5 000 (1 mark) $56 000 (0 mark)

(1 mark for each item & correct figure but not for the closing balance figure Dont penalise for carry on errors

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ACCT1501 Practice Exam Questions & Solutions

2012S1

Question 7 Management Accounting and Cost Concepts

The following information comes from the accounting records of Bother Ltd. for the quarter-ended December 1, 2008: $ Purchases of raw materials 6,000 Supplies used 825 Direct labour cost 11,500 Factory insurance 500 Commissions paid 1,600 Factory supervision 1,450 Advertising 800 Beginning work-in progress inventory (Sept 1) 12,000 Ending work-in-progress inventory (Dec 1) 15,500 Beginning raw materials inventory (Sept 1) 3,725 Ending raw materials inventory (Dec 1) 2,000 Beginning finished goods inventory (Sept 1) 5,700 Ending finished goods inventory (Dec 1) 2,950 Required: Prepare a Cost of Goods Manufactured statement for the quarter-ended December 1, 2008.

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ACCT1501 Practice Exam Questions & Solutions

2012S1

No penalties for carry on errors!

Bother Ltd Statement of COGM For the quarter-ended Dec 1, 2008 Direct Materials: Beginning raw materials inventory Add: Purchases Materials available Less: Ending inventory Direct materials used Direct labour Manufacturing overhead: Supplies used Insurance Supervision Total overhead costs Manufacturing costs added (or total manufacturing costs) Add: Beginning WIP Total manufacturing costs Less: Ending WIP Cost of Goods Manufactured 3,725 6,000 9,725 2,000 7,725 11,500 825 500 1,450 2,775 22,000 12,000 34,000 15,500 18,500

0.5 0.5 0.5 0.5 0.5 0.5 0.5 1.0 0.5 0.5 0.5 0.5 1.0 0.5 0.5 0.5 0.5 0.5

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ACCT1501 Practice Exam Questions & Solutions

2012S1

Question 8 CVP analysis

Sunset Ltd. manufactures and sells snorkelling gear. In 2011, the company hires a new manager who worked for an international company in China before. He tells the CEO that he knows a supplier in China who would produce the same snorkelling gear as Sunset Ltd and sell it at an extremely low price. He suggests it would be much more profitable for Sunset Ltd. to buy the snorkelling gear at $40 and resell it instead of manufacturing the gear. In fact, the cost for one purchased snorkelling gear ($40) equals the contribution margin per unit when manufacturing it ($40). The new manager argues the decision to buy would be especially profitable, since the company is in need of a new machine for the manufacturing process, which costs $50,000 (useful life of 5 years and no salvage value). Manufacturing fixed costs amount to $100,000. Selling and administration costs have recently been up to $70,000. The amount of snorkelling gear sold has constantly been around 15,000 units per year in the past. For 2011, the company is expecting the same volume and also plans to set the same price again ($70). The CEO asks you whether you also think that buying snorkelling gear instead of manufacturing it would be a good decision. 1. Help the CEO in making a decision by looking at the different impact on profit under the two scenarios (buying versus manufacturing). (Note: Provide a suggestion for the CEO by looking at profit only; neglect any strategic reasons or similar) In the following, assume that Sunset Ltd. does not decide to buy and resell the snorkelling gear but to keep manufacturing it. 2. What would the break-even point be for 2011 (provide the calculation of the break-even point and a graphical solution)?

Solution: 1. Revenues = 15,000 * $70 = $1,050,000 (1mark) Total costs (buying) = 15,000 * $40 + selling/admin costs = $670,000 (1mark) Profit (buying) = $380,000 (1mark) Depreciation expense: $10,000 (1mark) Contribution margin per unit = $40 => at a price of $70, variable costs per unit must be $30 (1mark) Total costs (Manufacturing) = selling/admin costs + fixed costs + variable costs Total costs (Manufacturing) = $70,000 + $110,000 + 15,000*$30 = $630,000 (1mark) Profit = $420,000 (1mark) Hence, the buying scenario results in a profit, which is $40,000 less. The company should keep manufacturing the gear instead of buying despite the new investment of the machine. (1mark)

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ACCT1501 Practice Exam Questions & Solutions

2012S1

2. BEP = $110,000 / ($70-$30) = 2,750 units (1mark for result, 1 mark for graphic)

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ACCT1501 Practice Exam Questions & Solutions

2012S1

MCQ practice questions You have seen samples of MCQ in the lectures and in your quiz attempts.

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