AF101: INTRODUCTION TO ACCOUNTING AND

FINANCIAL MANAGEMENT PART I

SCHOOL OF ACCOUNTING AND FINANCE

Final Examination
Semester 2, 2020

Online Mode
Duration of Exam: 3 hours + 10 minutes

Reading Time: 10 minutes

Writing Time: 3 hours

Instructions:

1. This paper has 2 sections. All questions are compulsory.

2. Answer all your questions in the answer booklet provided. Multiple Choice
questions to be answered on extra paper provided and attached to answer
booklet.
3. This examination comprises 50 % of overall mark.
4. There are 14 pages to this examination paper.
5. This is a closed book examination.
6. Materials allowed (Only calculator)
7. Assume GST of 10% in all GST related questions.

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SECTION A MULTIPLE CHOICE QUESTIONS 25 MARKS
Answer in the ‘multiple choice grid’ provided by circling the correct answer.

[Suggested Time: 45 minutes]

1. Cash (settlement) discounts are primarily issued to:

a. encourage customers to purchase goods on CR.
b. encourage customers to pay their account early.
c. encourage customers to pay for purchases in cash.
d. provide discounts to customers who purchase goods in bulk quantities.

2. Which of the following is not an advantage of the perpetual inventory system?

a. A stock-take is not required
b. Allows stock losses to be identified
c. Allows cost of sales to be calculated at any time
d. Continuous

3. Under the perpetual inventory system, what is the entry for the credit purchase of 10 violins at
$600 each plus 10% GST?
a. DR Inventory $6600; CR Accounts payable $6000; CR GST payable $600
b. DR Inventory $6000; DR GST receivable $600; CR Accounts payable $6600
c. DR Inventory $6600; CR Accounts payable $6600
d. DR Inventory $6000; CR Accounts payable $5400; CR GST payable $600

4. Brisbane sold goods to Darwin on credit at a price of $880 including GST. What is the entry to
record this transaction in Brisbane’s books under either the perpetual or periodic inventory
system? (Ignore the transfer to Cost of Sales required under the perpetual system.)
a. DR Accounts receivable $880; CR Sales $880
b. DR Accounts receivable $800; CR Sales $800
c. DR Accounts receivable $880; CR Sales $800, CR GST payable $80
d. DR Accounts receivable $800; DR GST payable $80; CR Sales $880

5. Vaka Ltd uses a periodic inventory system with the specific identification method of cost
assignment.
Date Units Unit Cost

Beginning Inventory July 1 1000 10

Purchase 10 2000 11

Purchase 20 1000 13

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 On 25 July 500 units from beginning inventory and 1500 units from the 10 July purchase were sold.
What was the value of ending inventory at 31 July?

a. $10 500
b. $34 500
c. $26 000
d. $23 500

6. Tutee Ltd uses the FIFO assumption with the periodic inventory method.
Units Unit Total

Cost Cost

Beginning Inventory 10 $10 $100

Purchase 10 $12 $120

Purchase 8 $9 $72

Sales during year were 14 units. What was the value assigned to the closing stock of this item at
the end of the period?

a. $84
b. $98
c. $108
d. $144

7. If inventory prices are rising the method of inventory valuation that gives the highest profit and the
highest ending inventory is:

a. Weighted average
b. Periodic method
c. FIFO
d. LIFO

8. The statement relating to the moving average method of costing inventories, used with the
perpetual inventory system, that is true is:

a. A new average cost is calculated after each sale and each purchase
b. A new average cost is calculated after each sale
c. A new average cost is calculated at the end of each month
d. A new average cost is calculated after each purchase

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 9. These are the purchases and sales of Commodity C during the month of May. A perpetual inventory
system is used.
Balance on hand 1 May: 10 units @ $10 each.

Purchases:

May 3 10 units @ $12

May 12 6 units @ $13

May 25 12 units @ $10

Sales:

May 7 14 units

May 27 10 units

The value of the stock of Commodity C at 31 May using the FIFO method of costing inventory is:

a. $146
b. $140
c. $168
d. $182

10. The inventory on hand at year-end for Nads Enterprises is:

Inventory Item No. of Units Original Unit Cost Current Net Selling Current
$ Price per Unit $ Replacement Cost
per Unit $

A 10 40 60 50

B 8 70 60 65

At what amount should Nads Enterprises report ending inventory if the lower of cost or net
realisable value rule is applied to individual items?

a. $1020
b. $960
c. $880
d. $1160

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11. LJ Company calculates that this year’s estimated bad debts expense will be $7500. When LJ
Company makes the adjusting entry the effect will be:
Bad Debt Allowance for Doubtful Debts Gross Accounts

Expense Receivable

a. No affect Increase Decrease

b. Increase Increase No affect
c. No affect Decrease No affect
d. Increase No effect Decrease

12. Corona Ltd recorded sales of $180 000 during the year (net of GST). Of these, $80 000 were on
credit. Bad debts have averaged one half of one percent of credit sales. The entry to estimate bad
debt expense for the year is:
a. Bad Debts Expense 400

Allowance for Doubtful Debts 400

b. Bad Debts Expense 900

Allowance for Doubtful Debts 900

c. Bad Debts Expense 400

Accounts Receivable 400
d. Bad Debts Expense 900
Accounts Receivable 900

13. On 31 December 2017 Sicuro Enterprises decided that it needed to finally write off as a bad debt a
receivable of $4400 (including $400 GST) from Simone Pty Ltd (in liquidation). If Sicuro uses the
allowance method the entry to achieve the write off is:

a. Debit Bad Debts Expense $4400; credit Accounts Receivable $4400

b. Debit Allowance for Doubtful Debts $4000, debit GST Payable $400; credit Accounts Receivable
$4400
c. Debit Bad Debts Expense $4400; credit GST Payable $400; credit Accounts Receivable $4000
d. Debit Allowance for Doubtful Debts $4000; credit Bad Debts Expense $4000

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Use the information below to answer questions 14 - 16.

Bula Advertising’s Accounts Receivable is currently $213 200 with a balance in the allowance for doubtful
debts account of $430 Cr, before the adjustment at the year ended 30th June 2020 for debts not expected to
be recovered. Ignore GST.

Aged Schedule of accounts receivable at 30th June 2020

Accounts Receivable Estimated % Uncollectable

Not yet due $60 000 1.0%

1-30 days overdue 100 000 1.5%

31-60 days overdue 45 000 2.0%

Over 60 day overdue 8 200 15.0%

14. Using the Ageing (balance sheet) method calculate the closing balance in the Allowance for
Doubtful Debts account at 30th June

a. $600
b. 1 500
c. $900
d. $4 230
15. Calculate the estimated bad debts expense for 30th June from the above information.

a. $4 230
b. $430
c. $3 800
d. $4 660

16. What will be the balance of accounts receivable that will appear in the balance sheet as at 30th
June?

a. $213 200
b. $208 970
c. $212 700
d. $209 400

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17. Mountainview car sales provides a one year labour and parts warranty with every car sold and
at the start of 2018 had a provision of $13 500 to cover warranty claims. On 30 March 2018 $4
600 was paid out for repairs for vehicles under warranty. The correct accounting entry to record
the payment of the claims is:
a. Debit provision for warranties $4 600; credit bank $4 600
b. Debit warranty expense $4 600; credit provision for warranties $4 600
c. Debit provision for warranties $4 600; credit warranty expense $4 600
d. Debit warranty expense $4 600; credit bank $4 600

18. Power Consultancy reports:

Total assets $ 950 000

Profit 30 000

Current liabilities 285 000

If current assets = 60% of total assets Power's current ratio is:

a. 1 to 2
b. 3 to 2
c. 2 to 1
d. 2 to 3

19. The quick ratio (acid test ratio) reflects:

a. The belief that not all current assets can be liquidated immediately
b. The same information as the debt ratio
c. The relationship of quick assets to fixed assets
d. Management's reaction time to avoid losses

20. An increase in the inventory turnover ratio is normally considered to be favourable but could be
unfavourable if it means:
a. Inventory is less likely to become obsolete
b. Liquidity is greater
c. The firm not carrying enough inventory to meet its customer’s needs
d. Storage costs of inventory are lower

21. Leverage measures:

a. Whether the firm can pay its current liabilities
b. Profit as a portion of equity
c. Whether the firm can pay its long-term liabilities
d. The proportion of borrowed funds compared to equity

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22. Which of the following ratios would be the most helpful to an investor who is investing in
ordinary shares primarily for dividends rather than for appreciation in market price?
a. dividend yield.
b. current ratio.
c. rate of return on ordinary equity.
d. return on total assets.

23. The following information is included in the financial statements of Monty’s Mechanics:

Total assets $ 600 000

Profit 90 000

Current liabilities 320 000

If current assets = 40% of total assets the current ratio for Monty’s Mechanics is:

a. 0.53 to 1
b. 0.75 to 1
c. 1.33 to 1
d. 1.88 to 1

24. When calculating the quick (acid test) ratio, which of the following is normally deducted from
current assets?
a. Current liabilities
b. Cash and prepayments
c. Inventory and prepaid expenses
d. Inventory and accounts receivable

25. Possible explanations for inadequate profitability include all of the following except for:

a. expenses are too high.

b. selling prices are too low.
c. excessive investment in assets in relation to revenues.
d. borrowing costs too low.

~ Continue to Section B~

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SECTION B PROBLEM SOLVING QUESTIONS 75 MARKS
_____________________________________________________________________________________

--- Clearly show ALL workings done for Questions 26 - 28

QUESTION 26 NON-CURRENT ASSETS 30 MARKS

PART A: DEPRECIATION 12 MARKS

Bula Equipment Limited purchased a new excavator machine on 1 January, 2018.

 The amount shown on the invoice was $25,000.

 In addition, the department incurred transportation costs of $2,500 and constructed a
special stand for the machine, costing $500.
 The supplier indicated that the machine could be used for 8 years and traded-in for
$6,000 at the end of the 8th year.
 Assume GST of 10%.

Required:

i. Provide the general journal entry to record the purchase of the excavator machine on 1
January, 2018.
[4 marks]
ii. Using the Diminishing Balance method, calculate depreciation for the following years:
(Depreciation rate to be left at one decimal point)

a. 31 December 2018.
b. 31 December 2019
c. 31 December 2020

(Depreciation amounts to be rounded to nearest whole number)

[8 marks]

[Suggested Time: 22 minutes]

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PART B: REVALUATIONS 18 MARKS

True Blue Limited has disclosed the following non-current asset classes as at 30 June 2020:

Machinery $400 000

Less: Accumulated depreciation 100 000 $300 000
Buildings $900 000
Less: Accumulated depreciation 350 000 $550 000

At 1 July 2020, the directors of True Blue Ltd decide to adopt the revaluation model and revalue
the non-current asset classes to the following fair values:

Machinery $ 250 000

Buildings 850 000

Required:

(i.) Prepare general journal entries to record the revaluations, including any closing entries at
the end of the reporting period.
[10 marks]

(ii.) Assume that on 31 December, 2020 the company sold machinery for $280 000 cash. The
machinery had a useful life of 10 years and residual value of $50 000. Use straight-line
method of depreciation.

Provide the necessary general journal entry to record the sale and derecognition of
machinery. Assume GST of 10%.

[8 marks]

[Suggested Time: 32 minutes]

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QUESTION 27 COMPANIES 20 MARKS

[Suggested Time: 36 minutes]

At 30 June, 2020, Mountainview Limited’s equity was as follows:

Issued capital:

200,000 ordinary shares issued at $2.00, fully paid $ 400,000

80,000 6% preference shares issued at $1, fully paid $ 80,000
$ 480,000
Retained earnings $ 185,000
General reserve $ 140,000
Total equity $ 805,000

The following events occurred after 30 June, 2020:

2020

July 1 50,000 ordinary shares were privately placed with Q&M Insurance Limited.
The shares were paid for in full at a price of $2 each.

Final dividends out of retained earnings, as recommended in June, were

paid in cash. This included the 6% preference dividend for the year ended
July 24 30 June and a final ordinary dividend of 8c per share.

August 1 A ‘document’ was issued inviting subscriptions for 160,000 ordinary shares
at an issue price of $2.20, payable in full on application.

September 15 Applications closed, with applications having been received for 180,000
shares.

September 18 Directors allotted 160,000 shares with:

- applications for 20,000 shares rejected and the application money

refunded.
September 30 Share issue costs amounted to $4,600 and were paid on this date.

‘Continued on next page’

Page 11 of 14
Required:

a) Briefly explain why a ‘private placement’ would be preferred by Mountainview Ltd

compared to a public issue of shares.
[2 marks]

b) Name the ‘document’ issued to the public on 1 August and two items of information that
would be disclosed in it.
[3 marks]

c) Provide general journal entries for the above transactions from 1 July to 30 September.

[15 marks]

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QUESTION 28 STATEMENT OF CASH FLOWS 25 MARKS

The simplified financial statements of Titanium Ltd appear below.

Additional information

1. Dividends declared and paid were $26 400.

2. During the year equipment was sold for $10 200 cash. The equipment cost $21 600 and had a
carrying amount of $10 200 at the time of sale.
3. Depreciation expense is included as a selling expense in the income statement.
4. All sales and purchases are on credit.

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Required:

Prepare a statement of cash flows using the direct method. Use Statement of Cash Flows
template provided. Show all workings (hint: reconstruction of ledger accounts).

[Suggested Time: 45 minutes]

~THE END~

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