2016 ACM Sem 2 Final Exam Suggested Solution REVISED

POSTGRADUATE
Examination Paper – Semester 2, November 2016
103259 ACCOUNTING CONCEPTS AND METHODS (M)

ACCTING 7019 - SUGGESTED SOLUTIONS
LECTURER: NICOLE MOSCHAKIS
Official Reading Time: 10 mins

Writing Time: 180 mins
Total Duration 190 mins
Instructions to Candidate
1. Answer all twenty (20) multiple choice questions in Part A.
2. Answer all seven (7) questions in Part B.
3. This paper consists of twenty (20) pages PLUS a separate answer sheet for Part A.
4. This is a Closed Book examination.
5. You should answer all questions in the spaces provided on this paper. If you need
more space, continue your answer on the back of the page and clearly indicate that
the answer is continued.
6. Please allocate your time according to the percentage contribution of the questions.
Allocated marks are given at the beginning of each question.
7. Examination materials must NOT be removed from the examination room.
8. Fill in your student ID and name in the space provided below.
Materials:
Non-programmable calculator allowed.
Question Possible Marks

Marks Received
Part A 20
Part B 1 10 Student ID:
2 14
3 8 Last Name:
4 16
5 12 First Name:
6 14
7 6
Total 100
PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO

103259 Accounting Concepts & Methods (M) Final Examination - Semester 2, 2016 Page 2
PART A: Twenty Questions - Each Question is Worth 1 Mark.
Answer each of the following questions on the separate answer sheet

provided.
Ensure you fill your name and student number details on the answer sheet as
it will be separated from your exam scrip for marking.
1. Alpha Company reports the following balance sheet information for 2016:
1 January 2016 31 December 2016

Assets $160,000 $170,000
Liabilities $112,000 $114,000
Assuming the capital contribution made by the owners during 2016 was $2,000
and withdrawals were $12,000, the Profit for 2016 must have been:
a) ($2,000)
b) $2,000
c) $8,000
d) $18,000
e) None of the above
2. The Baseball Company uses an accounts receivable subsidiary ledger from which a
summary of customers and the amount they owe is prepared at the end of the period. This
summary is prepared to:
a) Prove that the subsidiary ledger agrees with the control account
b) Determine whether debits equal credits
c) Provide information that is necessary for trial balance preparation
d) Determine the amount that should be posted to the accounts payable control account
e) All of the above.
3. Segregation of duties involves:
a) Ensuring that only qualified accountants are employed in the accounting department
b) Separation of record-keeping from handling of assets
c) Providing each staff member with an individual password
d) All of the above
4. Shareholders’ equity does not include:
a) Liabilities
b) Reserves
c) Retained profits
d) Preference shares
e) Ordinary shares
5. An essential requirement for an asset to exist for accounting purposes is
a) It must be legally owned by the entity

b) It must be tangible
c) It must be under the control of the entity
d) An exchange has occurred
e) It was purchased at cost
6. The following information relates to the inventory of Jones Ltd for June 2016.
Units Unit cost Total cost

Opening balance 300 $2.00 $ 600
12/6 Purchase (excluding GST) 600 $2.25 $1,350
A physical stocktake on 30 June 2016 verified that 500 units of inventory were on hand.
From the above information, and assuming a weighted average cost flow assumption,
determine the amount (rounded to the nearest dollar) of inventory on hand as at 30 June
2016.
a) $1,153
b) $1,513
c) $1,531
d) $1,055
e) $1,510
7. Which item should not be included in the income statement’s cost of inventory?
a) Goods and Services Tax (GST)

b) Insurance costs on goods in transit to company
c) Costs associated with receiving and inspecting the goods
d) Costs incurred in preparing the goods for sale
e) The invoice price of the goods
8. Which of the following is an example of an operating cash flow?
a) Dividends paid
b) Proceeds from sale of equipment
c) Payment of wages
d) Borrowing $10,000 from a finance company
e) Proceeds from issue of shares
9. Which depreciation method can result in the annual depreciation expense increasing or
decreasing from period to period?
a) Reducing balance
b) Straight-line method
c) Units-of-production
d) Sum-of-the-years digits
e) Direct method
10. The current ratio indicates:
a) Whether an entity has been paying its debts on a timely basis

b) An entity’s ability to satisfy its obligations in the short term
c) The dollar amount of total funds available to meet long-term obligations
d) An entity’s ability to satisfy its obligations without selling its inventory
11. “A business activity is separated from the owner’s personal activity.” Which accounting
concept or assumption is this statement following:
a) Going concern assumption

b) Accounting entity assumption
c) Faithful representation
d) Relevance
e) Materiality
12. Papier Ltd has a sales journal, purchases journal, cash receipts journal, cash payments
journal and a general journal. In which journal would you record a cash refund to a
customer for returned goods?
a) Sales Journal
b) General Journal
c) Purchases Journal
d) Cash Receipts Journal
e) Cash Payments Journal
13. When companies issue shares, the issue is sometimes oversubscribed. Oversubscription
means that:
a) Companies receive offers to purchase more shares than the company is

offering to the public.
b) Companies receive offers to purchase less shares than the company is offering to the
public.
c) Companies will sell more shares than initially offered to the public.
d) Companies will sell less shares than initially offered to the public.
14. Amy Lewin operates a home decorating business as a sole trader. She would like to invite
a friend to help her with the business, and would consider converting the business to a
partnership. Which of the following is a disadvantage of converting to a partnership?
a) It is easy to form and is less costly to establish than other business forms
b) It is not subject to a lot of government regulation and supervision
c) Partners have flexibility in decision making – they are not under the control of a
board of directors as in a company
d) Allows for the pooling of skills and capital.
e) Unlimited liability – the partners are liable for the obligations of the partnership
15. A company sold equipment, which had a carrying value of $30,000, for $45,000. State
whether this transaction will appear in the operating, investing or financing sections of the
Statement of Cash Flows, the amount that will appear and whether it is a cash inflow or
cash outflow.
a) Financing, $45,000, inflow

b) Investing, $45,000, inflow.
c) Financing, $30,000, inflow.
d) Operating, $45,000, outflow.
e) Investing, $30,000, outflow
16. The main purpose of a bank reconciliation statement is to:
a) To ensure that the debit equals the credit.

b) To identify the differences between the bank statement’s balance and the
company’s cash at bank ledger account.
c) To ensure that all subsidiary ledgers of customers are balanced with the accounts
receivable control account.
d) To reconcile the closing inventory balance with the opening inventory balance.
e) None of the above.
17. Closing entries are done:
a) On the first day of the next accounting period.

b) At any time during the accounting period.
c) On the last day of the accounting period.
d) On the second day of the next accounting period.
e) None of the above.
18. The link between the Balance Sheet and the Statement of Changes in Equity is (are):
a) Between the Profit and the Net Assets.

b) Between the closing balance of Cash at Bank account in the Balance Sheet and the
opening balance of the Total Equity.
c) The closing balances of the Share Capital, Retained Earnings, and Reserves.
d) Between the Profit and the Retained Earnings.
19. Which inventory costing method assigns to the ending inventory the newest (the more
recent) costs incurred during the period:
(a) Average Cost.

(b) First in, first out (FIFO).
(c) Last in, first out (LIFO).
(d) Specific unit cost
(e) All of the above
20. Which item does appear on a Statement of Cash Flow prepared by the direct method?
(a) Depreciation
(b) Profit
(c) Gain on Sale of Land
(d) Cash paid to suppliers and employees
(e) Loss on Sales of investment property
PART B: Eight Questions – Each Question Must Be Attempted.
QUESTION 1 (10 marks)
On 9 September 2016, Rustic Gourmet’s Catering provided $2,800 worth of catering services
on credit at a party that night.
Required:
Using the definitions and recognition criteria from the Conceptual Framework, explain how
Rustic Gourmet should recognise the catering services provided on credit on 9 September
2015. Use the Short Answer format.
Solution:
On 9 September 20X3, Rustic Gourmet’s Catering should recognise $2,800 as an asset

(accounts receivable) in the Balance Sheet and as income (services revenue) in the Income
Statement due to the definition and recognition criteria of these elements of the Conceptual
Framework being satisfied.
The essential characteristics of an asset are also satisfied because there is: a past transaction
(the services provided to the customer); control (Rustic Gourmet’s Catering can deny others
access to the future benefits); and future economic benefits (cash will be received from the
customer). In addition, the two recognition criteria of an asset are satisfied. First, it is probable
that future economic benefits of $2,800 will occur (there is a greater than 50% probability of
cash being received from the customer). Second, the amount of the asset can be measured
reliably ($2,800).
In addition to satisfying the definition and recognition criteria of an asset, the essential
characteristics of a revenue are satisfied because there is an increase in an asset (accounts
receivable owed by the customer), resulting in an increase in equity (an increase in an asset
with no change in liability) apart from owners’ contributions. In addition, the provision of
catering services also satisfies the two recognition criteria of revenue. First, it is probable that
there has been an increase in future economic benefits because of an increase in assets
(accounts receivable increased). Second, the amount of increased future economic benefits
can be reliably measured ($2,800).
(a) Kelly’s Krisps is preparing a cash budget for March and April 2016. Of the budgeted
monthly sales, 70% are on credit. Of the credit sales, 60% are collected in the month of
the sale, 30% are collected in the month following the sale and 5% are collected in the
second month following the sale. 5% are never collected and are written off. Below are
the budgeted sales for the months of January, February, March and April.
January $ 115,000
February 162,000
March 139,000
April 125,000
Required: (Show all your calculations).
Prepare a schedule of expected cash receipts from sales for March and April 2016.
10 marks
Solution:
March April
Cash sales (30% sales) $ 41,700 $ 37,500
Current month (60% credit sales) 58,380 52,500
From previous month (30% credit sales) 34,020 29,190
From 2 months earlier (5% credit sales) 4,025 5,670
Total budgeted collections $ 138,125 $ 124,860
(b) Describe two (2) principles of cash management. Explain why each principle is important.
4 marks
Solution:
Two principles of cash management and why they are important. Any two of:
 Reduce collection time for accounts receivable – money owed cannot be used by the
business – but cannot alienate customers by being too aggressive with collection
policies
 Postpone payments to accounts payable – business can use the funds right up to the
due date of the payable
 Keep inventory levels to a minimum – inventory ties up cash and incurs storage and
insurance costs
 Invest surplus cash – produces a return to provide additional cash
 Plan for capital expenditures – surplus cash can be used to reduce reliance on external
financing – and financing can be negotiated early.
Total marks - Question 2 = 10 + 4 = 14 marks

Delight Ltd sells washing machines. The following transactions occurred during April 2016:
2 April Purchased 40 washing machines for $350 each plus GST on credit.
10 April Returned 3 defective washing machines to the supplier.
21 April Sold 15 washing machines for $600 each plus GST on credit.
Required: (Show all your calculations. Narrations are not required).
Prepare all general journal entries to record the above transactions using the perpetual
inventory system. GST is 10%.
Total marks - Question 3 = 8 marks
Solution:
2 April
Dr Inventory - Washing machines $14,000
Dr GST Receivable 1,400
Cr Accounts Payable $15,400
10 April
Dr Accounts payable 1,155
Cr Inventory - Washing machines 1,050
Cr GST Receivable 105
21 April
Dr Accounts receivable 9,900
Cr GST Payable 900
Cr Sales 9,000
Dr Cost of goods sold 5,250

Cr Inventory - Washing machines 5,250
Edwards Electrical gives you their financial statements for the year ended 30 June 2016 which
show a profit of $75,600. On examination of the records you find the following:
1. Rent due from customers of $450 is not included in the financial statements.
2. The annual premium of $720 for insurance was paid in advance on 1 April 2016 and
debited to Prepaid Insurance.
3. Commission owed to sales staff on 30 June 2016 amounted to $1,200.
4. A payment of $680 for new office furniture on 28 June 2016 had been debited to
Sundry Expenses.

(a) Prepare the general journal entries required to make the necessary adjustments to the
financial statements of Edwards Electrical. Ignore GST.
8 marks
Solution:
Dr Rent receivable 450
Cr Rent revenue 450
Dr Insurance expense ($720 x ¼) 180

Cr Prepaid insurance 180
Dr Salaries expense/commissions exp 1 200

Cr Salaries payable 1 200
Dr Office furniture 680

Cr Sundry expenses 680
(b) Calculate the effect of the adjustments on the profit of Edwards Electrical.
3 marks
Solution:
The effect on profit:

Revenue: Rent $450
Expenses: Salaries $1 200
Insurance 180
Sundry (680)
Expenses ($700)
Profit ($250)
Profit before tax is decreased by $250 to $75,350
(c) AFC is a partnership owned by John Andrews, Claire Francis, and Noah Collett.
Their profit and loss share arrangement is 1:3:4 respectively. The AFC adjusted trial
balance as at 31 December 2016 is as follows:
AFC
Adjusted Trial Balance
as at 31 December 2016
Account Name Debit Credit
Cash $ 9,000
Inventory 13,000
Motor Vehicle 20,000
Accum Dep – Motor Vehicle $ 10,000
Building 180,000
Accum Dep - Building 50,000
Accounts Payable 7,000
Mortgage Payable 50,000
John Andrews – Capital 63,000
Claire Francis – Capital 35,000
Noah Collett – Capital 27,000
John Andrews – Drawings 7,000
Claire Francis – Drawings 4,000
Noah Collett – Drawings 1,000
Sales Revenue 100,000
Cost of Sales 74,000
Salaries Expense 22,000
Rent Expense 12,000 _________
Total $ 342,000 $ 342,000
Required:
Prepare an Income Statement for the year ending 31 December 2016 and calculate the
distribution of the profit (loss) to each partner. 5 marks
Solution:
AFC
Income Statement
For the year ended 31 December 2016
Sales revenue $100 000
Cost of sales 74 000
Gross profit $26 000
Salary expense 22 000
Rent expense 12 000
Loss for the month $(8 000)
Allocation of loss:
Andrews ($8 000 x 1/8) $ (1 000)
Francis ($8 000 x 3/8) (3 000)
Collett ($8 000 x 4/8) (4 000)
Total loss allocated to the partners $(8 000)
Total marks - Question 4 = 8 + 3 +5 = 16 marks
QUESTION 5
Moana Ships Ltd sells boats on credit. The accounting records at 30 June 2016 reveal the
following. Ignore GST.
Credit sales (for year) $1,340,000
Credit sales returns and allowances (for year) 70,000
Accounts receivable (balance 30 June 2016) 320,500
Allowance for doubtful debts (credit balance 30 June 2016) 1,500
Moana Ships uses the net credit sales method to estimate the bad debts. In the past, the
company’s yearly bad debts expense had been estimated at 2% of net credit sales revenue.
During the six month period from 1 July to 30 Dec 2016 attempts to recover amounts owed by
some customers were unsuccessful and $5,500 was written off as a bad debt.
Then, on the 7 Jan 2017 one of those customers (Aldinga boats) which had been written off as
bad debts surprisingly paid $3,000.
Required: (Show all your calculations. No narrations required).
(a) Prepare all general journal entries to account for the above transactions. Ignore GST.
8 marks
Solution:
2016
June 30 Bad Debts Expense $25,400
Allowance for Doubtful Debts $25,400
[Allowance made on 2% of net credit sales ($1,340,000 – $70,000)]
Dec 30 Allowance for Doubtful Debts 5,500

Accounts Receivable 5,500
2017
7 Jan Accounts Receivable (Aldinga Boats) 3,000
Bad Debts Recovered 3,000
Cash at bank 3,000

Accounts Receivable (Aldinga Boats) 3,000
(b) Using the t-account format, determine the balance in the Allowance for Doubtful
Debts. Provide all relevant details and balance the account correctly.
4 marks
Solution:
Allowance for Doubtful Debts

30/12 Accounts Rec 5,500 30/6 Balance $1 500
Balance c/d 21,400 30/6 Bad debt exp 25,400
26,900 26,900
30/6 Balance b/d 21,400
Total marks - Question 4 = 8 + 4 = 12 marks

Windy Ltd is not registered for GST (i.e. there is no GST) and prepares financial reports on
the 30 June each year.
On 1 January 2010, Windy Ltd purchased a production press for their factory with a loan of
$100,000 and the balance was paid for in cash. The production press cost $120,000 and it
also cost Windy Ltd $1,000 to transport the press to their premises and $2,000 for installation
and testing costs that had to be carried out before the press could be used. In addition, staff
training for the new press cost $500. The press was estimated to have a useful life of 10 years
at which time it would have an estimated $5,000 residual value. It is expected that economic
benefits will be received from the press evenly over its useful life.
On 25 November 2011 Windy Ltd paid $200 cash to replace a minor part on the press.
On 1 June 2012, a hydraulic pump was installed in the press at a cost of $9,000. After the new
pump was installed, the useful life of the machine was 8 years from the date of the installation
and the residual value was revised to $8,000.
On 1 July 2013 the machine was sold for $80,000.
(a) Record all general journal entries in relation to the press from purchase to
disposal.
12 marks
Purchase price $120,000
Transport 1,000
Installation & testing 2,000
Overall cost 123,000
Jan 1 Equipment 123,000

2010 Cash at Bank 23,000
Bank Loan 100,000
(Purchase of equipment)
Jan 1 Staff training expense 500

2010 Cash 500
(Staff training costs)
June 30 Depreciation Expense – Equipment 5,900

2010 Accum. Depreciation – Equipment 5,900
($123,000 - $5,000) /10  ½ = $5,900

($123,000 - $5,000) /10 = $11,800 pa.)
Nov 25 Repairs expense 200

2011 Cash at bank 200
(Repair of equipment)

(11 months’ depreciation $11,800*11/12)
June 1 Accumulated depreciation – Equipment 28,517

2012 Equipment 28,517
($5,900 + $11,800+ $10,817)
June 1 Equipment 9,000

2012 Cash at Bank 9,000
(New hydraulic pump –
new carrying amount of
$123,000 – $28,517 + $9,000 = $103,483)
June 30
2012 Depreciation Expense – Equipment 995
Accum. Depreciation – Equipment 995
(1 month depreciation: ($103,483-8,000) /
8yrs x 1/12)

($103,483-8,000) / 8yrs)
July 1 Cash at Bank 80,000

2013 Proceeds on Sale of Equipment 80,000
(Sale of equipment)
Carrying Amount of Press Sold 90,553

Accumulated Depreciation – Equipment 12,930
Equipment 103,483
(Write off equipment)
b) Determine the amount of gain or loss made on the sale of the press.
Carrying amount $90,553

Proceeds on sale 80,000
Loss on sale $10,553
Total marks Question 6 = 12 + 2 = 14 marks

(a) Below is some selected data for Dan’s Toyworld:
2015 2016
Sales $1,500,000 $2,200,000

Interest expense $80,000 $220,000
Tax expense $110,000 $200,000
Net profit after tax $200,000 $300,000
Assets $2,500,000 $4 250 000

Liabilities $1,500 000 $3,000,000
Owners’ equity $1,000,000 $1,250,000
Number of shares issued 500,000 500,000

Share price $1.00 $1.20
Dividend per share $0.08 $0.10
Note: total assets at the end of 2017 were $2,000,000 and owner’s equity at the end of
2017 was $800,000.
Required:
Calculate one ratio (refer to attachment below on page 21) that relates to the long term
solvency of Dan’s Toyworld for both 2015 and 2016. Briefly explain the purpose of the ratio
calculated and interpret the results of your calculations.
6 marks
Solution:
Debt ratio = Total liabilities/total assets
2015
= $1,500,000/$2,500,000 = 60%
2016
= $3,000,000/$4,250,000 = 71%
Purpose of the ratio – to determine the level of indebtedness of the company. It indicates
financial risk and measures the percentage of assets provided by creditors. The ratio
indicates the margin of safety to the creditors – the lower the ratio, the greater the asset
protection to creditors
Results – the debt ratio for Dan’s Toyworld is high – and should be of great concern to
creditors. In 2016, it means that 71% of the assets are financed by credit, and in the event
of financial difficulty, the company may have difficulty repaying their creditors.
Times interest earned = EBIT/finance costs
2015
= ($200,000 + $110,000 + $80,000)/$80,000

= 4.88 times
2016
= ($300,000 + $200,000 + $220,000)/$220,000

= 3 27 times
Purpose of the ratio – to measure the ability of the company to satisfy its borrowing costs
(interest expense) from current profit. EBIT is used as it is a measure of profit available to
pay the cost of financing.
Results – the ratio has declined for Dan’s Toyworld in 2016. Finance costs are a greater
proportion of profit in 2009. The debt ratio is higher, indicating a much higher level of debt
and this is reflected in the lower interest cover. Whilst just adequate, there is some danger
to the company if profitability declines.
Total marks – Question 8 = 6 marks

Question 7 Attachment: Ratio formulae
Current ratio = Current assets

Current liabilities
Quick ratio = Cash assets + receivables

Current liabilities
Debt ratio = Total liabilities

Total assets
Return on total assets = Profit before interest and tax

Average total assets
Return on ordinary = Net profit after tax – preference dividends

shareholders’ equity Average ordinary shareholders’ equity
Profit margin = Net profit after tax

Revenue
Times interest earned = Profit before interest and tax

Finance costs expensed + finance costs capitalised
Cash flow adequacy ratio = Cash from operating activities

Repayment of borrowing + assets acquired + dividends paid
Debt coverage = Total Non-current liabilities

Cash from operating activities
Cash flow to revenues = Cash from operating activities

Revenue
Operations index = Cash from operating activities

` Profit after interest and tax
Cash flow return on assets = Cash from operating activities + tax paid + interest paid
Average total assets
Receivables turnover = Net sales revenue

Average receivables balance
Inventory turnover = Cost of sales

Average inventory
Reinvestment = Payment for property, plant and equipment

Cash from operating activities
END OF EXAMINATION

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POSTGRADUATE

Examination Paper – Semester 2, November 2016

103259 ACCOUNTING CONCEPTS AND METHODS (M)

LECTURER: NICOLE MOSCHAKIS

Official Reading Time: 10 mins

Non-programmable calculator allowed.

Question Possible Marks

PLEASE DO NOT COMMENCE WRITING UNTIL INSTRUCTED TO DO SO

PART A: Twenty Questions - Each Question is Worth 1 Mark.

Answer each of the following questions on the separate answer sheet

1 January 2016 31 December 2016

3. Segregation of duties involves:

4. Shareholders’ equity does not include:

5. An essential requirement for an asset to exist for accounting purposes is

a) It must be legally owned by the entity

Units Unit cost Total cost

a) Goods and Services Tax (GST)

8. Which of the following is an example of an operating cash flow?

10. The current ratio indicates:

a) Whether an entity has been paying its debts on a timely basis

a) Going concern assumption

a) Companies receive offers to purchase more shares than the company is

a) Financing, $45,000, inflow

16. The main purpose of a bank reconciliation statement is to:

a) To ensure that the debit equals the credit.

17. Closing entries are done:

a) On the first day of the next accounting period.

a) Between the Profit and the Net Assets.

(a) Average Cost.

PART B: Eight Questions – Each Question Must Be Attempted.

QUESTION 1 (10 marks)

On 9 September 20X3, Rustic Gourmet’s Catering should recognise $2,800 as an asset

QUESTION 2 (14 marks)

Required: (Show all your calculations).

Total marks - Question 2 = 10 + 4 = 14 marks

Required: (Show all your calculations. Narrations are not required).

Total marks - Question 3 = 8 marks

Dr Cost of goods sold 5,250

QUESTION 4 (16 marks)

Required: (Show all your calculations. Narrations are not required).

Dr Insurance expense ($720 x ¼) 180

Dr Salaries expense/commissions exp 1 200

Dr Office furniture 680

The effect on profit:

Total marks - Question 4 = 8 + 3 +5 = 16 marks

Required: (Show all your calculations. No narrations required).

Dec 30 Allowance for Doubtful Debts 5,500

Cash at bank 3,000

Allowance for Doubtful Debts

Total marks - Question 4 = 8 + 4 = 12 marks

QUESTION 6 (14 marks)

On 1 July 2013 the machine was sold for $80,000.

Required: (Show all your calculations. Narrations are not required).

Jan 1 Equipment 123,000

Jan 1 Staff training expense 500

June 30 Depreciation Expense – Equipment 5,900

June 30 Depreciation Expense – Equipment 11,800

Nov 25 Repairs expense 200

June 1 Depreciation Expense – Equipment 10,817