Question 1:
A. What does the term accrual accounting mean in terms of the way we account for transactions. Discuss two principles or concepts which drive the use of accrual accounting.
B. Fox Ltd has calculated profit on the 30th June 2015 to be $359700 when the following was discovered (the firm uses accrual accounting).
(i) Income of $1690 for services delivered had been invoiced but not yet received in cash.
(ii) The weekly wages bill for the firm is $41200. The last payment for wages was on Friday 26th June. The next payment will be on Friday 3rd July.
(iii) The firm had received funds of $15000 on 1st April 2015 for work to be completed by end of October 2015. 40% of the work has been completed by June 30th.
(iv) A full year's rent of $33000 was paid for the premises from which the firm operates on 1st March 2015.
(v) The firm has $40000 invested. It earns interest of 7% per annum payable quarterly.
Interest was last received on 1st May for the quarter (February, March, April).
(vi) Office Supplies had a balance at the beginning of the year (after adjustments) of $1200.
Throughout the year $5000 in office supplies was purchased. At June 30th the value of office supplies was $1600.
(vii) An amount of $10000 paid for new Office Furniture had been incorrectly coded and entered as Office Expenses.
Required:
(i) Make the journal entries to adjust the accounts affected where necessary (include narrations to explain the entry and any
(ii) What would be the new profit figure after taking into account the above adjustments? (You must show calculations to get full marks).
Age of Account Accounts Receivable Uncollectable Estimate
0-1 month 95000 0.8%
1-6 months 188500 4.0%
7-12 months 48400 10.0%
More than 12 months 5650 80.0%
Question 2:
A. A business executive remarked: "Accountants use a dual standard for measuring assets. Some are on the balance sheet because they have real future economic value. Others are only there because they are left over from the profit measurement process. We classify them accordingly because of that".
With regard to this remark discuss:
(i) 3 examples of assets that might fit each of the two categories.
(ii) How are assets usually measured? Is there a dual standard?
(iii) How are assets usually classified? What is the basis for the classification of Assets?
(iv) In summary, do you agree or disagree with the remark?
B. The following balances appeared in the ledger of Lo Gloss and Co on 31st May, 2015.
|
Accounts Receivable
|
Dr
|
354,360
|
|
Bad and Doubtful Debts
|
Dr
|
16,840
|
|
Allowance for Doubtful Debts
|
Cr
|
12,310
|
|
Sales
|
Cr
|
2,648,420
|
The transactions for June were:
(i) Sales cash $123570
credit $98000
(ii) Cash collected from customers $114630
(iii) A cheque for $300 (not included in (ii)) was received from a debtor whose debt of $800 had been previously written off.
(iv) Investigation of a credit balance in a debtors account showed that a credit sale of $500 for goods had not been recorded.
(v) Doubtful Debts are normally provided for each month at the rate of 2 per cent of credit sales. After an analysis of accounts receivable balances on 30th June (after the transactions for June had been recorded) below, it was decided to write off all debts more than 12 months overdue and to adjust allowance for doubtful debts to agree with the uncollectable estimate given by the accounts receivable age analysis:
|
Age of Account
|
Accounts Receivable
|
Uncollectable Estimate
|
|
0-1 month
|
95000
|
0.8%
|
|
1-6 months
|
188500
|
4.0%
|
|
7-12 months
|
48400
|
10.0%
|
|
More than 12 months
|
5650
|
80.0%
|
Required:
(i) Record the above information in appropriate ledger accounts including balances at beginning. Create extra accounts as necessary (either T or three column).
(ii) Illustrate in an extract from a classified Income Statement and Balance sheet how the relevant accounts and their balances would appear.
(iii) Give a brief explanation for choice of method of calculating allowance for bad debts.
Question 3
A. Fistral Ltd acquires a blank-making machine - blanks are the inner foam core of a surfboard - for the following amounts:
Initial price paid to the supplier $70000
Cost to deliver the machine to the site $5000
Amount to paint the company name on the machine $1500
Amount paid to an engineer to fit the machine ready for work $35000
Insurance cover taken out on the machine $2200
Repairs made to replace bolts which had dislodged during transit $500
Required:
(i) Calculate the value of the machine for depreciation purposes. Explain your reasons for including or excluding certain items in the calculation;
(ii) Choose a method of depreciation taking into consideration the impact of each available method on yearly profits;
(iii) Discuss when and why you might consider revaluing this asset.
B. Fred's Freighthauling Pty Ltd has a small fleet of delivery trucks. Each one is depreciated on the reducing balance method (rate 20%). Truck 4 was purchased on the 1st July 2011 for $96000. Residual value was estimated at $16000 and useful life 10 years. It was sold on 31st March, 2015 for $40000. The company's financial year end on 30th June each year.
(i) What was the total depreciation on Truck 4 to the date of its disposal?
(ii) Based on your answer to Question 1, write a journal entry to record the disposal of Truck 4.
(iii) Redo questions 1 and 2 assuming the company uses straight line depreciation.
(iv) Calculate the difference of the two depreciation methods on the company's Profits for 2015.
Ignore tax effects.
(v) The use of different depreciation methods could affect financial performance comparisons between financial years for a particular company, and between different companies for the same financial year. What implications (if any) could this have for potential investors or
creditors?
(vi) How are these differences mitigated?
Question 4
A. Axiom limited is deciding whether it will use the periodic or perpetual method of accounting for inventory. The firm uses FIFO and has 10 units of inventory worth $50 each on hand at the start of the period. The following information is provided:
1. Purchased 20 units of inventory at $60 each on credit from suppliers.
2. Returned 1 of those units of inventory to suppliers.
3. Sold 12 units on credit to customers for $200 each.
4. A customer returned 2 units that had arrived damaged. They were destroyed.
5. A stocktake revealed 14 units on hand at the end of the period.
Required:
(i) Prepare relevant journal entries for both the perpetual and periodic inventory methods.
(ii) Prepare income statements for each inventory method.
|
Perpetual
Trans Particulars
|
DR
|
CR
|
Periodic
Trans Particulars DR CR
|
|
1.
|
|
|
1.
|
|
2.
|
|
|
2.
|
(Note: you might like to use a Table as below)
(iii) Which method is preferable and why?
(iv) Is it possible to revalue inventory upwards? If so when, and explain the rule that might be applied?
B. Examine the most recent financial reports for Woolworths Ltd on their website and answer the following questions:
(i) Identify the approach or method is adopted for each of the items below and how this was reported:
(a) Revenue recognition
(b) Inventory valuation
(c) Depreciation of non-current assets
(d) Bad and doubtful debts
(ii) What statement (if any) does the company make about ethical practice?