HI 5001 Accounting for Business Decisions

HI 5001 Accounting for Business Decisions
Trimester 1
Holmes Institute

Instructions:

This paper consists of five questions.
All questions are compulsory.
Total marks for this paper are 50.

Materials allowed:

Students are permitted to use a non-programmable electronic calculator.
Students are permitted to use a non-electronic English dictionary.

QUESTION 1 (10 marks) ‘Why are adjusting entries necessary? Surely they cause too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this criticism.”

QUESTION 2 (10 marks) ABC Publishing Ltd sells a monthly political journal on credit. The accounting records at 30th June 2010 revealed the following:

Accounts receivable $ 323 500
Allowance for Doubtful Debts 1 500

The following analysis was obtained with respect to the accounts receivable:

 Balance % uncollectable
Accounts not yet due $ 173 600 ½
Accounts overdue: 10-30 days 60 000 2
 31-60 days 42 000 10
 61-120 days 26 400 25
 121 days & over 21 500 40
 $ 323 500

Required

Prepare the necessary general journal entry to bring the allowance for doubtful debts to the appropriate amount at 30th June 2010. 5 marks
Prepare and balance the Allowance for Doubtful Debts account and the Bad Debts Expense account for the year ending 30th June 2010.

QUESTION 3 (10 marks) The following information has been extracted from the records of Good Stationery about one of its popular products. Good Stationary uses the moving average (or “weighted average cost”) method under a perpetual inventory system. Its annual reporting date is 31st December. Ignore GST.

2010 No of Units Unit Cost
Jan 1 Beginning inventory 900 $7.00
 6 Purchases 400 7.05
Feb 5 Sales @ $12.00 per unit 1 000
March 17 Purchases 1 100 7.35
April 24 Purchases returns 80 7.35
May 4 Sales @ $12.10 per unit 700
June 26 Purchases 8 400 7.50
July 11 Sales @ $13.25 per unit 1 800
Aug 19 Sales returns @$13.25 per unit 20
Sept 11 Sales @ $13.50 per unit 3 500
Oct 6 Purchases 500 8.00
Dec 11 Sales @ $15.00 per unit 3 100

Required

a) Prepare full inventory records (ie a “stock card”) to show the cost of sales for the year and the cost of the closing inventory, using this format:

Date	Explanation	Purchases	Sales	Balance
Date	Explanation	Units	Unit Total Cost Cost	Units	Unit Cost	Total Cost	Units	Unit Cost	Total Cost
1/1	Beg inv	900	$7.00	$6 300

(b) Show the effect of this inventory item on Good Stationary’s Income statement in the following format (answer in work book, not on this page):

GOOD STATIONERY

Income Statement

for the year ended 31 December 2010

INCOME

Sales

Less : Sales Returns and allowances

Net sales

Less : Cost of sales

GROSS PROFIT

QUESTION 4 (10 marks) KLM Ltd purchased new equipment on 1st January 2010, at a cost of $420 000 net of GST. The company estimated that the equipment had a useful life of 5 years and a residual value of $45 000.

Required

Assuming a financial year ending 30th June, calculate the amount of depreciation expense for each year ending 30th June 2010 through to 30th June 2015, with each of the following methods:

straight line 2 marks
sum-of-years-digits 4 marks
diminishing balance using the formula 1-(r/c)1/n 4 marks

QUESTION 5 (10 marks) Discuss the general limitations of financial statement analysis.

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