TERM 2 2000-01 EXAMINATION

DEGREE OF BACHELOR OF BUSINESS MANAGEMENT

APRIL 2001

ACCT101 FINANCIAL ACCOUNTING

INSTRUCTIONS TO STUDENTS
1

The time allowed for this examination paper is 3 hours.

This examination paper comprises 13 pages, 5 questions and 4 tables.

Answer all questions.

The total number of marks is 100.

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ACCT101

Question 1
x
x
x
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
The journal entry to record depreciation expense is
(a)
(b)
(c)
(d)

2.

The balance sheet provides information about

(a)
(b)
(c)
(d)

3.

The net resources which an entity has acquired, including information on

how these resources are financed
How the resources of an entity change over time
The profitability of the operations of the entity
The total amount of cash available at the end of the accounting period.

Which one of the following is true: (The financial year runs from 1 January 2000
to 31 December 2000)
(a)
(b)
(c)
(d)

4.

An application of the matching principle

A recognition of the loss in value of the asset
An offsetting credit either to Cash or Accounts Payable
A discretionary process of the management to reduce profits for the period.

The income statement reports the results of the earning activities of the
entity for the year ended 31 December 2000
The income statement shows the financial position of the entity as at 31
December 2000
The balance sheet shows the earning activities of the entity for the year
ended 31 December 2000
The balance sheet shows the financial position of the entity for the year
ended 31 December 2000

Revenue is recognized when earned and expenses are recognized when incurred,
regardless of the time cash is received or paid. This is the application of:
(a)
(b)
(c)
(d)

Cash basis accounting

Accrual basis accounting
The matching process
The cash flow principle

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ACCT101

5.

Which one of the following statements best describes why increases in expenses
are recorded as debits:
(a)
(b)
(c)
(d)

6.

Which one of the following pairs cannot occur in the same simple journal entry:
(a)
(b)
(c)
(d)

7.

(b)
(c)
(d)

The collection of $100 cash is recorded by a debit to cash and a credit to

accounts payable
A cash purchase of machinery is recorded as a debit to repairs and a credit
to cash
A ledger account with a credit balance is listed as a debit amount in the trial
balance
A purchase of a computer for $2,000 is entered as a debit of $200 to office
equipment and a credit of $200 to accounts payable

A $1,500 invoice for office equipment purchased on credit was incorrectly entered
as a $1,500 purchase of inventory on credit. An adjusting entry would be:
(a)
(b)
(c)
(d)

9.

Increase in assets; increase in revenue

Increase in expense; decrease in assets
Decrease in assets; decrease in liabilities
Decrease in liabilities; increase in expense

A trial balance will not balance if:

(a)

8.

Because expenses decrease cash

Because expenses are liabilities
Because expenses increase assets
Because expenses decrease owners equity

Debit office equipment $1,500; credit accounts payable $1,500

Debit office equipment $1,500; credit inventory $1,500
Debit inventory $1,500; credit accounts payable $1,500
Debit inventory $1,500; credit office equipment $1,500

Which one of the following cannot occur during an accounting period:

(a)
(b)
(c)
(d)

A net profit earned and cash decreased

Owners equity decreased and assets increased
Liabilities and owners equity increased and assets decreased
A net profit earned and owners equity decreased

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ACCT101

10. ABC Ltd uses accrual basis of accounting. In 2000, the company reported $41,000
in salaries expense on the Income statement. Its comparative balance sheet
showed salaries payable of $800 at year-end 1999 and $2,400 at year-end 2000. If
the company were to use cash basis accounting, what would be the salaries
expense for 2000?
(a)
(b)
(c)
(d)

$39,400
$41,000
$41,800
$42,600

11. XYZ Ltd purchased a car costing $85,000 when it started operation at the
beginning of this year. Terms of the transaction were $5,000 down payment and
the balance in 5 equal annual payments. At the current year end, the company
should charge to expense:
(a)
(b)
(c)
(d)

The entire cost of the car

The portion of the cost that was paid for in the current year
No part of the cost as it is not completely paid for
The portion of the cost based on its usage this year.

12. Which one of following occurs when inventory is sold:

(a)
(b)
(c)
(d)

Increase a liability and an asset

Decrease a revenue and a liability
Increase an asset and decrease a liability
An asset and a revenue increase at the same time

13. On 1 January 2000, SCL Ltd had a credit balance of $3,100 in the Allowance for
Bad Debts Account. During the year 2000, $6,900 was written off as bad debts.
Aging analysis of accounts receivable at 31 December 2000 indicated that the
amount of probable uncollectibles would be $5,300. What would be the amount
of Bad Debt expense for 2000?
(a)
(b)
(c)
(d)

$9,100
$6,900
$5,300
$2,200

14. The primary purpose for using an inventory flow assumption, e.g. FIFO is to:
(a)
(b)
(c)
(d)

Be in line with the physical flow of inventory

Minimize income tax liability
Be compatible with the perpetual inventory system
Offset against revenue an appropriate cost of goods sold

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ACCT101

15. In January 2001, the accountant of Ace Products Ltd was in the process of
determining the approximate cost of inventory as at 31 December 2000 for the
purpose of preparing the financial statements for the year 2000.
The physical inventory was last taken on the 20 December 2000. The
following additional information is as below:
Physical inventory as at 20 December 2000
$875,000
Transactions for the period 21 December to 31 December 2000:
Sales of inventory
$600,000
Purchases of inventory
$350,000
The normal gross margin on sales averaged 40%.
Using the gross profit method, the approximate inventory at 31 December
2000 was:
(a)
(b)
(c)
(d)

$875,000
$865,000
$625,000
$360,000

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ACCT101

Question 2
The Instant Photo Studio is located at a busy shopping center, processing film for
customers within an hour, using high-tech processing and developing equipment. A
typical monthly Income Statement shows the following:
Revenue
Processing fees earned
Operating Expenses
Salaries
Rent
Materials and Supplies
Equipment depreciation
Other expenses
Net Income
1.
2.
3.

4.
5.

$33,500
$ 3,500
12,000
1,600
6,000
1,400

$24,500
$ 9,000

All processing fees are received in cash. There are no credit customers. Apart
from Equipment Depreciation, all expenses are paid in cash.
The lease for the premises will expire in 9 months. The owner of the shopping
center has indicated that a 10% increase in rental will be imposed upon the
renewal of the lease for a further 3 years.
The equipment is one year old and is being depreciated over its estimated useful
life of 3 years, using the straight-line method. However, it is envisaged that it can
still be productive beyond the end of its estimated useful life. More efficient
equipment is expected to come online within a year. The estimated cost of the
new equipment is $300,000.
Although digital cameras have become increasingly popular in Singapore,
revenue has not been adversely affected over the last few years, as many
Singaporeans still prefer hard copy photographs.
The owner of Instant Photo Studio plans to sell the business for $400,000 and is
willing to accept a cash payment of $112,000 plus 36 monthly installment
payments of $8,000 each.

Your good friend, David Tan is very keen to buy the business. Although he feels that
the sales price is reasonable, he is worried about the monthly payments, as the business
will leave him with only $1,000 to cover his personal monthly expenditure of about
$3,500.
Required:
(a) Explain to David the nature of depreciation expense.

( 8 marks)

(b) Prepare a statement showing how much cash the business will generate in the
next 12 months. Will the amount be sufficient to cover Davids personal
expenditure for the year?
( 8 marks)
(c) Do you agree with David that the business is a good buy? Your answer must
include the need to replace the existing equipment, the expenditure that might
occur and the timing of such expenditure.
( 6 marks)
(Total: 22 marks)
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ACCT101

Question 3
Smartie Maddie (SM) was incorporated in Singapore with an authorized capital of
$5,000,000, divided into 10,000,000 shares of $0.50 each. The company operates as a
distributor of integrated chips and printed circuit boards and uses the periodic system
to record its inventory. At 31 December 2000, the following trial balance was
prepared.
$000
Net sales
Inventory, at cost 1 January 2000
Purchases
General & Administrative expenses
Selling & Distribution expenses
Allowance for bad debts as at 1 January 2000
Interim dividend paid
Building, at cost
Accumulated depreciation building
Equipment, at cost
Accumulated depreciation equipment
Accounts receivables
Cash
Accounts payable
10% 5-year Loan
Share capital
Share Premium
Retained earnings
Total

$000
8,454

1,300
6,600
288
845
33
135
2,000
800
710
300
1,220
189

13,287

350
500
2,000
400
450
13,287

You are given the following additional information:

(1)

On 28 December 2000, a supplier shipped merchandise costing $20,000 to the

company on FOB destination terms. This item was included in the purchases for
2000 but no payment was made. The goods arrived on 8 January 2001.

(2)

The company received $154,000 cash from a new customer in December 2000
for an order of merchandise to be delivered in January 2001. This item was
incorrectly treated as a sale in 2000. The cost of the above merchandise of
$70,000 was excluded from the year-end's physical inventory count.
The total value of the inventory arising from the physical inventory count on 31
December 2000 amounted to $1,530,000.

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ACCT101

(3)

An analysis of the accounts receivable at 31 December 2000 produced the

following:
Age category
1 to 30 days
31 to 60 days
61 to 90 days
91 to 120 days
Over 120 days
Total

(Receivables) Allowance for Bad debts

400,000
0
250,000
2,500
350,000
17,500
120,000
12,000
100,000
20,000
$1,220,000
$52,000

In addition, customers' accounts amounted to $50,000 were to be written off.

(4)

On 1 July 2000 SM borrowed from its bankers a $500,000 Loan. No interest had
so far been provided.
Loan interest should be shown as a separate item in the Income Statement.

(5)

The company's depreciation policy on long term assets was as follows:

(i) Building: straight line over 20 years on cost
(ii) Equipment: straight line over 10 years on cost

(6)

The company prepared the following bank reconciliation statement as at 31

December 2000.

Less: Outstanding Cheques

Balance per the Cash Book

$212,000
35,000
247,000
60,000
187,000

Unadjusted balance per Cash Book

Less: Bank Service charge
Adjusted cash book balance

$189,000
2,000
187,000

Credit Balance per Bank Statement

Add: Deposits in Transit

The bank charges are to be classified under General & Administrative

expenses.
(7)

The directors of the company declared a final dividend of 10% less tax of 25%
for the year ended 31 December 2000.

(8)

Provide 25% tax on the net income for the year.

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ACCT101
Required
(a)

Prepare adjusting entries (narrations not required) for items (1 to 7) necessary for
the preparation of SMs financial statements for the year 2000. Show workings
where appropriate.
(12 marks)

(b)

Prepare in statement form:

(i) SMs Income Statement for the year ended 31 December 2000
( 7 marks)
(ii) SMs Balance Sheet as at 31 December 2000.
( 7 marks)
(Total: 26 marks)

Question 4
PQR Ltd issued $500,000 of 8% 5-year Bonds on 1 January 2000. Interest is payable
semiannually on 1 July and 1 January. The prevailing market rate of interest for similar
type of Bonds is 6%. The company uses the effective rate to amortize the premium.
Required
(i)

Determine the issue price of the Bonds. (Calculate to the nearest $)

(ii)

Prepare the journal entries to record

(a) The issue of Bonds on 1 January 2000
(b) The interest payment on 1 July 2000

( 4 marks)

( 4 marks)
(iii)

Show the Bonds liability as at 1 July 2000

( 2 marks)
(Total: 10 marks)

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ACCT101

Question 5
The comparative financial statements of Big Deal Business Limited (BDBL) as at 31
March 2000 and 2001 are appended below:
BDBL
Balance Sheet as at 31 March
2001 ($)
2000 ($)
225,000
Cash at bank
279,400
359,400
Account receivable
312,000
381,300
Inventories
325,800
383,800
Land
1,278,000
Plant and Equipment
990,000
536,400
Less Accumulated Depreciation
741,600 428,400
561,600
Investments
290,000
2,091,100
1,768,800
Share Capital, fully paid ($1 each)
Share Premium
Retained Earnings
Long-term Loan
Accounts Payable
Dividends Payable
Tax Payable

1,080,000
98,200
435,900
225,000
162,000
90,000
2,091,100

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900,000
43,200
324,600
100,000
198,000
136,000
67,000
1,768,800

ACCT101

Income Statement for year ended 31 March 2001

Sales
Less: Cost of Goods Sold
$ 325,800
Beginning Inventories
2,182,200
Add: Net Purchases
2,508,000
Less: Closing Inventories
381,300
Gross Margin
Operating Expenses
108,000
Depreciation
1,008,000
Other operating expense
Operating Income
Other Income
Gain on sale of investments
Net Income before tax
Tax expense
Net Income after tax
Retained Earnings of previous years

$3,582,000

2,126,700
1,455,300
1,116,000
339,300
24,000
363,300
90,000
273,300
324,600
597,900
162,000
$435,900

Proposed dividends
Retained Earnings
The following additional information was taken from the records of BDBL:

(1) The investments were sold for $314,000.

(2) The ordinary shares were issued at a premium for cash and all monies were
received.
(3) There were no disposal of plant and equipment during the year.
(4) All plant and equipment and the land were acquired for cash.
(5) All purchases and sales during the year were made on credit.
Required
Prepare a statement of cash flows of the company for the year ended 31 March 2001.
Show all workings. (You may use either the Direct or Indirect method to calculate the
operational cash flow)
(12 marks)

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ACCT101

Present Value of $1 at the end of t years = 1/(1+r)^t

Number
of years
1
2
3
4
5
6
7
8
9
10
11
12

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

0.9709
0.9426
0.9151
0.8885
0.8626
0.8375
0.8131
0.7894
0.7664
0.7441
0.7224
0.7014

0.9615
0.9246
0.8890
0.8548
0.8219
0.7903
0.7599
0.7307
0.7026
0.6756
0.6496
0.6246

0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7109
0.6768
0.6446
0.6139
0.5847
0.5568

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

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

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

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

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

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
1
2
3
4
5
6
7
8
9
10
11
12

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

0.9709
1.9135
2.8286
3.7171
4.5797
5.4172
6.2303
7.0197
7.7861
8.5302
9.2526
9.9540

0.9615
1.8861
2.7751
3.6299
4.4518
5.2421
6.0021
6.7327
7.4353
8.1109
8.7605
9.3851

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

0.926
1.783
2.577
3.312
3.993
4.623
5.206
5.747
6.247
6.710
7.139
7.536

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

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

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

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

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ACCT101

Future value: Amount of $1 Due in n Periods

Number
of years
1
2
3
4
5
6
7
8
9
10
11
12

3%
1.030
1.061
1.093
1.126
1.160
1.194
1.230
1.267
1.305
1.344
1.384
1.426

4%
1.040
1.082
1.125
1.170
1.217
1.265
1.316
1.369
1.423
1.480
1.540
1.601

5%
1.050
1.103
1.158
1.216
1.276
1.340
1.407
1.477
1.551
1.629
1.710
1.796

6%
1.060
1.124
1.191
1.262
1.338
1.419
1.504
1.594
1.689
1.791
1.898
2.012

7%
1.070
1.145
1.225
1.311
1.403
1.501
1.606
1.718
1.838
1.967
2.105
2.252

8%
1.080
1.166
1.260
1.360
1.469
1.587
1.714
1.851
1.999
2.159
2.332
2.518

9%
1.090
1.188
1.295
1.412
1.539
1.677
1.828
1.993
2.172
2.367
2.580
2.813

10%
1.100
1.210
1.331
1.464
1.611
1.772
1.949
2.144
2.358
2.594
2.853
3.138

11%
1.110
1.232
1.368
1.518
1.685
1.870
2.076
2.305
2.558
2.839
3.152
3.498

12%
1.120
1.254
1.405
1.574
1.762
1.974
2.211
2.476
2.773
3.106
3.479
3.896

11%
1.000
2.110
3.342
4.710
6.228
7.913
9.783
11.859
14.164
16.722
19.561
22.713

12%
1.000
2.120
3.374
4.779
6.353
8.115
10.089
12.300
14.776
17.549
20.655
24.133

Future value: Amount of an annuity of $1 per Number of payments

Number
of years
1
2
3
4
5
6
7
8
9
10
11
12

3%
1.000
2.030
3.091
4.184
5.309
6.468
7.663
8.892
10.159
11.464
12.808
14.192

4%
1.000
2.040
3.122
4.247
5.416
6.633
7.898
9.214
10.583
12.006
13.486
15.026

5%
1.000
2.050
3.153
4.310
5.526
6.802
8.142
9.549
11.027
12.578
14.207
15.917

6%
1.000
2.060
3.184
4.375
5.637
6.975
8.394
9.897
11.491
13.181
14.972
16.870

7%
1.000
2.070
3.215
4.440
5.751
7.153
8.654
10.260
11.978
13.816
15.784
17.888

8%
1.000
2.080
3.246
4.506
5.867
7.336
8.923
10.637
12.488
14.487
16.645
18.977

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9%
1.000
2.090
3.278
4.573
5.985
7.523
9.200
11.028
13.021
15.193
17.560
20.141

10%
1.000
2.100
3.310
4.641
6.105
7.716
9.487
11.436
13.579
15.937
18.531
21.384