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THE UNIVERSITY OF NEW SOUTH WALES
SCHOOL OF ACCOUNTING
SEMESTER 1 2015
FINAL EXAMINATION
ACCT 5930 FINANCIAL ACCOUNTING
Time Allowed: 2 Hours
Reading Time: 10 minutes
This examination paper has 9 pages
Total Number of Questions: 6
Total Marks Available: 100
Answer ALL questions
The questions are NOT of equal value
All answers are to be written in the examination booklet provided
Candidates are to supply their own calculators
All answers must be written in ink. Except where they are expressly required,
pencils may be used only for drawing, sketching or graphical work.
This paper may be retained by the candidate
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Question 1 Recording Transactions (20 marks)
The following nine independent events (parts a to i) occurred between 1 January 2014
and 31 December 2014 for Umizoomi Limited. Umizoomi Limited uses only a
general journal and general ledger. That is, they do not use special journals and
subsidiary ledgers.
Required:
Prepare the journal entry (if necessary) to record the event. Financial statements are
being prepared as at 31 December 2014. If you believe that no entry is necessary,
clearly write “No Entry”. A blank response will be marked as incorrect. Narrations
are not necessary.
Note that there is nothing unusual about the events which require you to
question, any more than would otherwise be the case, the definition and
recognition criteria of financial statement elements.
Please note that each part is not of equal value.
Part a (2 marks)
Umizoomi Limited received $4,000 from debtors.
Part b (2 marks)
$5,000 of wages relating to December 2014 has not been paid and needs to be
accrued.
Part c (2 marks)
At a board of directors meeting on the last day of the year, the company’s president
and other senior executives were awarded raises totalling $200,000 annually for 2015.
Part d (2 marks)
One of the cash receipts credited to sales revenue turned out to be a deposit of $500
made by a customer on an order that will be filled in October 2015.
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Question 1 (cont.)
Part e (2 marks)
While completing the bank reconciliation on 31 December, Umizoomi Limited
identified that cheque no. 513 for a purchase of inventory was incorrectly recorded as
a cash payment of $1,912 instead of $1,219.
Part f (2 marks)
Depreciation of $5,000 relating to Motor Vehicle was incorrectly credited to the
“Accumulated Depreciation- Building” account.
Part g (2 marks)
Umizoomi Limited borrowed $120,000 from the bank on 1 August 2014. The loan is
due on 30 June 2016 and carries an interest rate of 10 per cent per annum. Interest and
principal are payable at maturity.
Part h (3 marks)
Umizoomi Limited owns 30% of Smith Limited and has significant influence.
Accordingly, Umizoomi Limited uses the equity method to account for its investment
in Smith Limited. During the year ended 31 December 2014, Smith Limited reported
an after tax profit of $50,000. On 31 December 2014, Umizoomi received a cash
dividend of $3,000 which represented its share of the total dividend paid by Smith
Limited of $10,000.
Part i (3 marks)
A machine with a cost of $30,000 and accumulated depreciation to date of $22,000
was exchanged on 31 December 2014 for a new machine with a cash price of
$35,000. A trade-in allowance of $9,000 was allowed on the old machine, and a
cheque was drawn to cover the difference between the trade-in and the cash price.
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Question 2 Accounts Receivable (8 marks)
On 1 January 2014, Tigger’s Honeypot Limited has a debit balance of $22,000 in
Accounts Receivable and a credit balance of $ 2,500 in the Allowance for Doubtful
Debts. During 2014, Tigger’s Honeypot sold goods for cash for $20,000, and on
credit $60,000. On 7 July 2014, one of Tigger’s Honeypot’s customers, Mr. Poor,
went bankrupt. Mr. Poor owes Tigger’s Honeypot $500 and there is no hope for
recovering this amount. On 14 October, Tigger’s Honeypot collected $57,500 from
outstanding accounts. Tigger’s Honeypot’s financial year ends on 31 December.
Required:
Part a
1. If bad debts for 2014 are estimated to be 2% of credit sales, prepare the adjusting
entry on the 31 December 2014 to record bad debts expense. (2 marks)
2. Calculate the net accounts receivable after the adjusting entry. (2 marks)
Part b
If uncollectible accounts are estimated to be $3,000 from aging receivables, prepare
the adjusting entry on the 31 December 2014 to record bad debts expense. (2 marks)
Part c
Briefly explain what is meant by an allowance for doubtful debts. How does this
affect the valuation of accounts receivable? (2 marks)
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Question 3 Inventory (10 marks)
The following information is taken from the accounting records of Goofy’s Limited
for the year ended 31 December 2014. Goofy’s Limited uses a perpetual inventory
control system and first-in first-out (FIFO).
Units Purchase price/unit Selling price/unit
1/1/14 Inventory 1,000 $50
10/3/14 Purchases 2,000 $51
25/6/14 Sales 800 $70
30/8/14 Purchases 800 $53
5/10/14 Sales 1,500 $75
19/10/14 Purchases 500 $54
26/11/14 Purchases 700 $56
31/12/14 Sales 1,000 $73
Required:
1. Prepare the journal entry (or entries) necessary to record the sale (on credit) on 25
June 2014. (4 marks)
2. Calculate the cost of ending inventory as at 31 December 2014. (2 marks)
3. A stocktake revealed that inventory on hand as at 31 December 2014 was 1,600
units. Prepare the journal entry (or entries) necessary to recognise the inventory
shortage expense for the year of 2014. (2 marks)
4. Assume that, at the end of the year, Goofy’s Limited discovered that the net
realisable value of each item is $52. Calculate and prepare the journal entry (or
entries) necessary to adjust inventory records. (2 marks)
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Question 4 Noncurrent Assets (10 marks)
Part a
House at Pooh Corner Limited purchased a machine on 1 July 2013 at a cost of
$60,000. On 30 June 2014, it was identified that this was incorrectly debited to
machine expenses. The machine is expected to have a useful life of 5 years from the
date of purchase and a residual value of $10,000. The machine is to be depreciated
using the reducing balance method at a rate of 30%.
Required:
1. Prepare the journal entry (or entries) necessary to correct the above error as at 30
June 2014. (4 marks)
2. Over the life of the machine, what will be the total depreciation charged on the
asset (assume no changes in useful life, residual value and method of depreciation
over the life of the asset)? (2 marks)
Part b
During the audit of the accounts of Maisy Limited for the year ended 31 December
2014, it was discovered that the following errors had been made during the year. A
block of land, which was purchased for $80,000 in 2006 and revalued at $90,000
during 2010, was found to have a fair value of only $65,000 at 31 December 2014. No
entry has been made yet to record the fall in the value of this land.
Required:
Prepare the journal entry (or entries) necessary to correct the above error as at 31
December 2014. (4 marks)
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Question 5 Financial Statement Analysis (12 marks)
Kanga’s Limited is profitable. Kanga’s Limited’s financial statement relationships are
as follows:
Quick Ratio 1.5 times
Debt to Equity Ratio 0.7 times
Basic Earnings per Share $0.9
Required:
For each of the following transactions or events, indicate the directional effect
(increase, decrease, no change) on the Quick Ratio, Debt to Equity Ratio, and Basic
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 FIFO from LIFO for inventory valuation in a period of increasing
prices.
b). 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.
c). Sold an item of property plant and equipment with a carrying amount of $600,000
for $200,000.
d). Received $10,000 as a deposit from a customer for a job to be carried out in the
future.
e). Made a 1:4 bonus issue out of the revaluation surplus.
f). A court announced a decision on a product liability lawsuit and found that Kanga’s
Limited is liable for $100,000 damages to be paid within one year. The management
of Kanga’s Limited are contemplating an appeal to the decision, but the company’s
legal representatives believe that Kanga’s Limited would have very little chance of
winning. A contingent liability in the amount of $100,000 is currently disclosed in the
financial statements.
Provide your answers in a table as illustrated below.
Transaction
Quick Ratio Debt to Equity
Ratio
Basic Earnings per
Share
a) … … …
b)
c)
d)
e)
f)
Please note this question has been replicated in the online practice quiz so you can practice
completing this online
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Question 6 Cash Flow Statements (40 marks)
The financial statements of Owl’s Limited are presented below;
Owl’s Limited
Balance Sheets as at 31 December, 2014
('000s)
2014 2013
Current Assets
Cash 105 40
Accounts Receivable 260 135
Allowance for Doubtful Debts (60) (45)
Inventory 210 335
Prepaid Insurance 115 90
630 555
Non-Current Assets
Land 690 530
Buildings 460 400
Accumulated Depreciation – Buildings (200) (150)
Motor Vehicles 100 90
Accumulated Depreciation – Motor Vehicles (65) (55)
Equipment 120 120
Accumulated Depreciation – Equipment (75) (55)
1,030 880
Total Assets 1,660 1,435
Current Liabilities
Accounts Payable 150 135
Accrued Expenses 120 75
Income Tax Payable 35 50
Final Dividend Payable 40 50
345 310
Non-Current Liabilities
Bank Loan 585 485
Notes Payable 35 -
620 485
Total Liabilities 965 795
NET ASSETS $695 $640
Shareholders’ Equity
Share Capital 400 340
General Reserve 30 15
Revaluation Surplus 60 75
Retained Earnings 205 210
TOTAL SHAREHOLDERS' EQUITY $695 $640
Please note this question has been replicated in the online practice quiz so you can practice
completing this online
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Question 6 (cont.)
Owl’s Limited
Income Statement for the Year Ended 31 December 2014
('000s)
Sales 3,600
Less: Cost of Goods Sold 2,855
Gross Profit 745
Rent Revenue 20
Discount Received 5
770
Less Expenses:
Bad Debts Expense 25
Discount Allowed 5
Inventory Shortage Expense 10
Depreciation Expense – Buildings 50
Depreciation Expense – Motor Vehicles 25
Depreciation Expense – Equipment 20
Loss on Sale of Motor Vehicle 5
Loss on Devaluation of Land 20
Interest Expense 40
Other Expenses 480
Total Expenses 680
Profit before Income Tax 90
Less: Income Tax Expense 35
Profit after Income Tax 55
Additional Information
? Interest on the bank loan and note payable was fully paid as at 31 December
2014 (i.e. there was no prepaid interest or accrued interest).
? The carrying amount of the motor vehicle sold was $20,000.
? Land to the value of $35,000 was purchased with the issue of a long term note.
? Land is the only class of asset measured using the revaluation model. All other
non-current assets are measured at cost.
? A bonus dividend of $30,000 was paid out of the Revaluation Surplus.
? A cash dividend was paid during the year.
Required:
1. Prepare a Statement of Cash Flows (using the direct method) for Owl’s Limited for
the year ended 31 December 2014 in accordance with AASB107. (30 marks)
2. Prepare a note reconciling the Operating Profit after Income Tax with Net Cash
Flow from Operating Activities. (10 marks)
END OF EXAMINATION PAPER