SOLUTIONS - Spring 2017 – Accounting for Business Decisions B -

Practice Final Exam

Question 1: Non-Current Assets (10 Marks)

a) What is the maximum cost that can be included as part of the car’s purchase cost, as allowed
by the accounting standards? Make the appropriate journal entry(ies) for all costs paid in
July 2011 relating to the car.

Maximum cost includes all necessary costs to get the asset to its intended purpose.
$12,000 $2,000 + $500 + $1,200 = $15,700
Dr Car 15,700
Cr Cash 15,700

Dr Insurance Expense $1,000 (Pre-paid insurance is also correct)

Cr Cash $1,000

b) Journalise the purchase of the copyright, and calculate and journalise its amortisation for the
current year ending 30 June 2012.
Dr Copyright $1,200
Cr Cash $1,200

Dr Amortization expense 120

Cr Accumulated Amortization – Copyright 120

Working: Straight-line amortization (1,200 – 0)/5 = 240 amortisation per year.

However, it was purchased on 1 January, so only 6 months of Amortisation (120) is needed.
 c) Journalise the disposal of the old motor bike & purchase of the new one. Show all workings
for all your calculations.

Update depreciation: (10,000 – 3,000) / 70,000 = 0.1 per km

5,000km * 0.1 = 500 depreciation expense
Dr Depreciation Expense 500
Cr Accumulated Depreciation 500

New carrying amount = 5,100 – 500 = 4,600

Cost: 10,000
Acc Dep: =4,900 + 500 = 5,400
Traded in for 4000, therefore loss on sale of 600

Record sale:
Dr new Motor Bike 15,000
Dr Accumulated Depreciation 5,400
Dr Loss on sale 600
Cr Motor Bike 10,000
Cr Cash 11,000
Question 2: Partnerships – 10 marks:

1. Calculate and journalise the contributions of the partners into Moviestars.

Dr Cash 80,000
Dr Motor Vehicle 40,000
Dr Land 70,000
Dr Equipment 60,000
Cr Hilton capital 70,000
Cr Tatum capital 120,000
Cr Arnie capital 60,000

2. Journalise the distribution of the first year loss to the capital accounts of each of the
partners.
Total capital = 70,000+120,000+60,000 = 250,000
Hilton share: 70,000 / 250,000 = 28%
Tatum share: 120,000 / 250,000 = 48%
Arnie share: 60,000/250,000 = 24%

Dr Hilton capital 11,200

Dr Tatum capital 19,200
Dr Arnie capital 9,600
Cr Income Summary 40,000
(It will also be marked correct if you use Retained Earnings, but Income summary is more correct, as
partnerships don’t keep a retained earnings account).
Question 3: Financial Statement Analysis (8 Marks)

a. Calculate three profitability ratios for 2013 and comment on the firm’s performance.

ROA = 6.39%

ROE = 29.79%

PM = 26.92%

I will leave you to comment on the performance.

b. Please provide at least two liquidity ratios for 2013 and comment on the liquidity of the
firm

Current Ratio: 13.09

Quick Ratio: 12.45

I will leave you to comment on the liquidity measures.

Question 4: Shareholders Equity Accounting (10 Marks)

Give the journal entries for each of the transactions.

25 Feb.

Dr Cash trust 520,000

Cr Application 520,000

5 Mar. (Note there are multiple ways to present the below journals. If the date is correct, and the
ledgers add up to the same amount, you have the correct answer and will receive full marks. I have
split the entries up into 4 separate parts to try and make it easy)

Dr Cash 520,000

Cr Cash trust 520,000

Dr Application 500,000

Cr Ordinary Share Capital 500,000

Dr Allotment 750,000

Cr Ordinary Share Capital 750,000

Dr Application 20,000

Cr Allotment 20,000

31 March.

Dr Cash 730,000

Cr Allotment 730,000

25 April.

Dr Call 250,000

Cr Ordinary Share Capital 250,000

30 May.

Dr Cash 250,000

Cr Call 250,000
1 July.

Dr Retained Earning 25,000

Cr Dividend Payable 25,000

1 September.

Dr Dividend Payable 25,000

Cr Cash 25,000
Question 5: Cash Flows (15 Marks)

Pearce Pty Ltd

Statement of Cash Flows

For the year ended 30 June 2013

Net Profit: 200,000

Add: Depreciation Exp: 40,000

Less: Gain on sale ($15,000)

Add: Decrease in Inventory 10,000

Add: Decrease in Prepaid Insurance 15,000

Add: Increase Salary Payable 14,000

Subtract: Increase Accounts Receivable 5,000

Subtract: Decrease Accounts Payable 15,000

Subtract: Decrease Unearned Revenue 3,000

Cash flow for operations: 241,000

Investing Cash Flows

Sale of Equipment: 115,000

Cash flow from investing: 115,000

Financing Cash Flows

Dividends paid (10,000)

Loan repayment (12,000)

Cash flow from financing: (22,000)

Starting cash: 20,000

+ Total change in cash: 334,000

Ending cash: 354,000

Question 6: Budgets (6 Marks)

Solution:
Opening Balance 50,000
Plus Inflows;
Customers 125,000
Bill Receivable 17,000
Total cash inflows 142,000

Less Outflows
Inventory (187,500)
Operating Expenses (15,000)
Total cash outflows (202,500)

Cash Available (10,500)

Plus Borrowings 72,000

Closing Balance 61,500

*Depreciation is a non-cash expense, so is not included in a cash budget.

Question 7: Variance Analysis (8 Marks)
Required:

a) Calculate the material variances for Tim

b) Calculate the labour variances for Tim

DM price variance = AQpurchased(AP – SP)

DM price variance = 8600 ounces($1.50 – $1.52) = $172 F

DM usage variance = SP(AQused – SQ)

DM usage variance = $1.52(8600 – 9000) = $608 F

DL rate variance = AH(AR – SR)

DL rate variance = 13 200 hours($12.25 – $12.50) = $3300 F

DL efficiency variance = SR(AH – SH)

DL efficiency variance = $12.50(13 200 hrs – 12 000 hrs) = $15 000
Question 8: Performance management systems (8 Marks)

A) After the Restaurant sales increase by $65,000:

Total company Restaurant Catering

Sales $565,000 $440,000 $125,000
Less: Variable expenses $307,500 $220,000 $87,500
Contribution margin $257,500 $220,000 $37,500
Less: Traceable fixed costs $145,000 $45,000 $100,000
Division segment margin $112,500 $175,000 -$62,500
Less common fixed costs $130,000
Net profit -$17,500

*Note. The contribution margin ratio stays constant at 50% for the restaurant. So variable expenses
can be calculated at the new sales level.

B)

Starting Contribution margin ratio: $187,500 / $375,000 (Contribution margin / sales revenue) = 50%

Ending Contribution margin ratio: $400,000 / $220,000 = 50%

Starting Segment margin ratio: 142,500 / 375,000 (Segment margin / Sales revenue) = 38%

Ending Segment margin ratio: 175,000 / 440,000 = 39.77%

While the contribution margin ratio remains constant as sales increase and decrease, the
segment margin ratio does not, as the fixed costs remain constant, leading to an increase in
segment margin ratio as sales increase.

C)

Although both segments are generating a positive contribution margin, the Catering division has
a negative segment margin due. If Kristina closed down the Catering division, $100,000 in
traceable fixed costs would be removed, and the overall business would be profitable after
removing the underperforming segment.
Question 9: Ethics (10 Marks)
Note: this is the same as the Tutorial Extension question for Ethics.

To answer the ethics question in the exam, the best structure for your answer is as follows.

Identify the relevant principles in the case. Provide a definition of the relevant principle, and
then link the principle to the case to show how it has been breached. Define the relevant threat, and
link back to the case to show how that threat was present, and may have caused the principal to be
breached. Start a new paragraph, and repeat with the next relevant principle

Solution: Outline any of the relevant ethical principles and threats to ethical behaviour faced
by both you as the accounting partner, and by Company A.

What possible course of action should you take as the Auditor?

Key Issues:

• For Company A to remain trading, it requires a loan from the bank to fund its short
term cash flow requirements. The bank requires a clean audit of the firm to provide
further funding.
• Company A still owes you $125,000 for previous work, plus costs of the current mid-
year audit (~10% of your firms total fee revenue).
o If Company A is unsuccessful in getting a bank loan, they will not be able to
pay you back as they will be declared bankrupt.
• Integrity
o Company A used the August 2014 report to get a loan in September. Did the
report omit or obscure new information, such as the recent bad-debt write off
that occurred after the report was finalised.
o Your partnership needs to provide an honest and truthful audit report to the
bank. Is this firm a Going Concern?
• Objectivity
o Can you reach an objective opinion regarding the going concern opinion? You
would like to give a clean audit report to Company A, so they can get a bank
loan and pay back the significant debt they owe you. Will this influence your
decision?
• Professional Behaviour
o Does the bank know you have a conflict of interest? What impact would it
have on your firm’s reputation if you hide the debt from the bank and it is later
discovered you have an undisclosed conflict of interest.
 • Familiarity
o Over the past 5 years of working closely with Company A, is your objectivity
biased?
• Self Interest
o A $125,000 debt is owed to you that will only be paid back if Company A
receive a loan. Both you and Company A have the same incentive to receive a
loan and continue business operations, will this impact on objectivity and
integrity?

Identify relevant facts: Through a combination of circumstances, your firm is under

pressure to complete an audit assignment while it has a financial interest in the client. Your
firm has a clear interest in Company A receiving a clean audit.

Identify affected parties: Your firm, Company A, the bank, Company A stakeholders.

Possible Action:

You need to ensure that the audit opinion is reached objectively, but also that a reasonable
and informed third party would conclude that objectivity has been adequately safeguarded.

The bank will probably have reviewed Company A’s debtors and creditors at various times,
and may, at any time, question how your firm could retain objectivity. You may wish to pre-
empt such a question by disclosing to the bank (with the consent of your client, so as not to
breach confidentiality) the safeguards you have put in place. In any event, you should discuss
those safeguards with the directors of Company A, as there will be costs associated with the
safeguards, and it would appear reasonable to pass these costs on to the client.
The appropriate safeguards will depend on the significance of the threat presented by
the outstanding fees of $125,000. This will depend on many factors, including the personal
circumstances of you and your partners. In the context of the firm, the debt of $125,000
represents close to 10% of the firm’s annual income and, when the invoice is raised for the
current audit, the outstanding debt will be even more significant.
You must minimize the threat to objectivity brought about by the firm’s interest in
Company A continuing to trade. A possible solution may be to obtain directors’ guarantees in
respect of the outstanding fees. Provided the directors are in a position to provide such
guarantees, this would have a commercial benefit as well as an ethical one. It will almost
certainly be necessary to obtain legal advice before entering into such an agreement.
Introducing an independent auditor to review your firm’s audit work before the audit
report is signed could improve objectivity. This should be someone who is independent of the
firm and, therefore, unsympathetic to the firm’s interests. It may be advisable to engage a
consultancy company to perform the review, and to discuss with your client how the
additional costs will be met.
You should keep your partners informed of the issue, and the safeguards you intend to
implement, throughout the resolution process. You should document, in detail, the steps that
you take in resolving your dilemma, in case your ethical judgement is challenged in the
future.