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7/23/2019 ACCT101 Sample Paper_with Solution http://slidepdf.com/reader/full/acct101-sample-paperwith-solution 1/24  1  SAMPLE PAPER ACCT101 FINANCIAL ACCOUNTING CAUTION: 1. DO NOT rely on this sample  paper only 2. The exam coverage may not the same as this sample paper. Please refer to the announcement made in class.
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ACCT101 Sample Paper_with Solution

Feb 17, 2018

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SAMPLE PAPER

ACCT101 FINANCIAL ACCOUNTING

CAUTION:1. DO NOT rely on this sample paper only

2.  The exam coverage may not the same as this samplepaper. Please refer to the announcement made in class.

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PART A 

(1 mark each and 10 marks in total. Please choose ONE as your best choice.)

Provide the answers (in CAPITAL letter) on the first page of the Answer Script.

1.  Which of the following is a true statement?A.  A stock split will increase total stockholders' equity but a stock dividend will not.

B.  Both a stock split and a stock dividend will increase total stockholders' equity

C.  A stock dividend will increase total stockholders' equity but a stock split will not.

D.   Neither a stock split nor a stock dividend will increase total stockholders' equity.

2.  A company's accountant expenses a payment that should be capitalized. Which ofthe following is TRUE?

A.  Revenue is overstatedB.  Liabilities are overstated.C.  Expenses are overstated.D.  Assets are overstated.

3.  Which of the following items will NOT appear on the books side of thereconciliation?

A.  The bank collected an EFT of $1,000.

B.  A nonsufficient funds check of $75 returned to the bank.

C.  The bank recorded a $2,000 deposit as $200.

D.  The bank charged a service fee of $20.

4.  A check was written by a business for $205 but recorded in the cash payments journal as $502. How would this error be included on the bank reconciliation?

A.  A deduction on the bank side

B.  A deduction on the book side

C.  An addition on the bank side

D.  An addition on the book side

5.  A corporation has 15,000 shares of 10%, $50 par, noncumulative preferred stockoutstanding and 25,000 shares of no-par common stock outstanding. No dividendswere declared in 2008. At the end of 2009, the corporation declares a dividend of$150,000. How the dividend allocated between preferred and commonshareholders?

A.  The dividend is allocated $75,000 to preferred shareholders and $75,000 tocommon shareholders.

B.  The dividend is allocated $142,500 to preferred shareholders and $7,500 tocommon shareholders.

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C.  The dividend is allocated $150,000 to preferred shareholders and $0 to commonshareholders.

D.  The dividend is allocated $7,500 to preferred shareholders and $142,500 tocommon shareholders.

6. McGrawHill has the following account balances at the end of the currentaccounting period.

Beginning inventory $53,500 Net purchases 75,500 Net sales revenue 93,700A normal gross profit percent is 30%. What is the estimated ending inventory asdetermined by the gross profit?

A.  $100,890B.  $28,110

C.  $63,410D.  $65,590

7. An accrued expense is which of the following?

A.  An expense that the business has paid but not yet incurredB.  An expense that will be incurred and paid in the futureC.  An expense that the business has incurred but not yet paidD.  An expense that has been paid and incurred

8. On October 2, 2009, Allen Jewelry Company accepted a 120-day, 10% note for $2,400in settlement of an overdue account receivable. Based on a 360-day year, which of thefollowing is closest to the interest revenue accrued on December 31, 2009?

A.  $80B. $602)  $240D. $40

9. A corporation issues $400,000 of 10%, 5-year bonds at 103. What will be the totalinterest expense over the life of the bonds?

A.  $212,000B.  $200,000C.  $40,000D.  $188,000

10. The following information is available for Andersen Company for the month endingJune 30, 2008. Balance per the bank statement is $10,241.43. Balance per books is$9,745.06. Check #506 for $1,948.52 and check #510 for $1,800.25 were not recorded

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with the June 30 bank statement. A deposit in transit of $5,113.40 had not beenreceived by the bank when the bank statement was generated. A bank debit memoindicated an NSF check in the amount of $79 written by Bruce Garrett to AndersenCompany on June 13. A bank credit memo indicated an EFT collected by the bank of

$1,900 and interest revenue of $75 on June 20. The bank statement indicated servicecharges of $35. What is the correct cash balance per books?

A. $11,606.06E.  $12,000.06C. $13,000.00D.  $14,000.00E.   None of the above

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PART B 

Question 1 (18 marks)

Hong Leong Electronic Pte Ltd, with a fully paid-up capital of $100,000 ordinary sharesand $50,000 5% non-cumulative preference shares, was incorporated in SingLand on 1January 2008. The trial balance below has been extracted from the general ledger ofHong Leong Electronic Pte Ltd as at December 31, 2008.

Unadjusted Trial Balance of Hong Leong Electronic Pte Ltdas at December 31, 2008

Dr Cr

 Accounts Receivable 407,700

Inventory (31December 2008) 115,000

Cash 30,000

Prepaid Rent 16,000

Office Equipment 50,000

Sales Demonstration Equipment 46,000

Accounts Payable 116,200

 Note Payable 50,000

Allowance for Uncollectible Accounts 8,800

Provision for Warranty Repairs 2,100

Sales Revenue 1,055,800

Ordinary Share Capital 100,000

Preferred Share Capital 50,000Cost of Goods Sold 493,000

Salary Expense 130,600

Advertising Expense 81,800

General Office Expense 12,800

Total 1,382,900 1,382,900

 The following facts came to light after completion of the unadjusted  trial balance (thecompany makes adjustments annually):

a.  Inventory physical stocktaking on 31 December amounts to $100,000. b.  The last day of the period, 31 December 2008, was a Wednesday. The staff is paid

on Friday for their five-day working week ending on Friday. Staff salaries are$2,510 per week.

c.  Hong Leong purchased the office equipment on 1 January 2008 for $50,000 FOBshipping point. Transportation costs and installation costs amounted to $1,500 and$4,500, respectively. Hong Leong recorded the office equipment at $50,000 andrecorded the transportation and installation costs under the General OfficeExpense. The useful life of the office equipment is expected to be 10 years withresidual value of $2,000. The company decides to depreciate the office equipmentusing straight-line method.

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d.  The sales demonstration equipment was purchased on 1 April 2008. The usefullife of the equipment is 5 years with $6,000 residual value. Hong Leongdepreciates the sales demonstration equipment by double-declining method.

e.  Hong Leong issued a 12% three-month note payable of $50,000 on 1 December

2008.f.  Hong Leong estimates that the total cost of warranty claim for the electronic

 products sold will be 1% of sales revenue in the year of sale.g.  The year-end audit revealed that cash payment of $5,000 to the supplier was

erroneously recorded as a debit to Cash account and a credit to Accounts Payableaccount.

h.  On April 1, 2008, Hong Leong paid office rental in advance. The amount paidwas for a two-year period.

i.  $7,700 of Accounts Receivable needs be written off. Hong Leong then record theuncollectible-account expense based on the aging of receivables, as follows:

Age of AccountsAccountsReceivable

1–30Days

31–60Days

61–90Days

Over90 Days

$400,000 $100,000 $150,000 $100,000 $50,000Estimated percent

uncollectible0.5% 1.0% 4% 10%

 j.  Hong Leong declared a dividend of 10% for the common stockholders and regulardividends for the preferred stockholders. The declaration has not been recorded byHong Leong.

Provide the necessary adjusting journal entries for the above. No explanations arerequired for the adjusting journal entries.

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Question 2 (10 marks)

HDC issued $2,000,000, 8-pecent bonds on 1 January, Year 1 when the market rate ofinterest was 10%. The bonds required HDC to make semiannual payments of 4% of face

value, on June 30 and December 31 of each year. The bonds mature on December 31,Year 5. HDC amortizes bond premium/discount by the effective-interest method.

Periods  Present Value of $1  Present Value ofOrdinary Annuity of $1 

4% 5% 8% 10% 4% 5% 8% 10%

5 0.822 0.784 0.681 0.621 4.452 4.329 3.993 3.791

10 0.676 0.614 0.463 0.386 8.111 7.722 6.710 6.145

Required (all computations are rounded to the nearest dollar)

1) Provide the journal entry when HDC issued the bonds on January 1, Year 1.

2) Provide the journal entry for recognizing interest expense and interest paid onJune 30 and December 31,Year 1.

3) Show how HDC would report the bonds on its balance sheet on December 31,

Year 1.

4) On January 1, Year 2, these bonds are traded at 110 in the market. On this date,HDC repurchased 20% of these bonds on the open market and retired them.Provide the journal entry to record the repurchase.

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Question 3 (8 marks) 

Part A:The Hill Company purchased some equipment at July 1, 2008, for $16,000. Hill also paid

freight costs $1,500 and sales tax $500 in addition. Hill’s fiscal year starts from January1. Upon receipt, the following expenditures were incurred in 2008:

Major repair prior to use $1,000Installation 600Testing prior to use 400Operating costs after start of production 1,500Minor repair and maintenance after start of production 500

The company adopted a straight-line depreciation method and estimated that the usefullife of the equipment to be ten years from July 1, 2008. Hill expects that the residualvalue of the equipment will be $2,000 at the end of the useful life.

Required:

1) Determine the total depreciable value of the equipment.

2) Determine the book value of the equipment at December 31, 2008.

3) Hill received an offer to sell the equipment at January 1, 2009. If Hill sold theequipment for $23,000 in cash, what journal entry would they record for the sale ofthe equipment? No entry explanation is required.

Part B:Assume that the book value of the equipment above at December 31, 2008 is $22,000 andHill decided not to sell the equipment. On Jan 1 2009, a major improvement to theequipment took place, costing $900. As a result, the annual capacity was expanded, butits estimated life and residual value remained unchanged. On Jan 1 2010, due to signs of

severe wear, Hill revised its estimated useful life to be only five remaining years fromJanuary 1, 2010 and its residual value to be $1,000.

Required:

1) Determine the amount of depreciation expense for the equipment in 2009.

2) Determine the amount of depreciation expense for the equipment in 2010.

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Question 4 (8 marks) 

MBFA Corporation Limited is a manufacturer of furniture, with fiscal year ending onMay 31. It makes high-end home and office furniture for customers and design

innovative products and services to meet the customers’ needs. The following schedule istaken from its past three years’ annual reports (in US dollars). MBFA uses the allowancemethod to account for potentially uncollectible receivables.

Allowance forUncollectible

Accounts

Balance atBeginning of

Year

Added toExpenses

Write-offs Balance atEnd of Year

Year ended May31, 2007

111,000 30,000 A 80,000

Year ended May31, 2008 80,000 20,000 16,000 B

Year ended May31, 2009

C D 29,000 90,000

*Note: Assume that no recovery of accounts previously written off occurred from 2007 to2009.

Required:

1)  Solve for the four unknowns (A to D) in the table above

2)  Make all the journal entries which are related to the “allowance for uncollectibleaccounts” in 2008 (using the figure provided).

3)  For this question only, assume that MBFA uses the direct write-off method. In thiscase, what would be the journal entries for uncollectible account expenses for2008?

4)  Assume in 2009, the ending balance of the allowance is 10% account receivablesending balance. a) How much should it report for net account receivables on its

 balance sheet at the end of 2009? b)Show the partial balance sheet related toaccount receivables in 2009.

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Question 5 (17 marks) 

Part A:

Required: Use the letters below (either A or B or C) to indicate the effect of each ofthe four transactions (refer to 1 through 8 in the table below) on a firm's cash flows andon the same firm's net income. Your concern should be with only the transactiondescribed and at the date of the transaction described.  Ignore related transactions prior to or after the transaction described.

A. IncreaseB. DecreaseC. No effect

Effect onTransactions Total Cash

Flows

 Net Income

I) Sale of long-term operating asset for $20,000 cash.The book value of the operating asset at date of salewas $12,000. 

1.? 2.?

II) Depreciation expense of $5,000 was recorded.  3.? 4.?

III) Purchase of long-term operating asset for $10,000on a credit basis (A note is issued).  5.? 6.?

IV) Cash collection of accounts receivable = $5,000.  7.? 8.?

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Part B:Kocian Co.

Income StatementFor the Year Ended December 31, 2010 

($ in thousands) Sales Revenue 2,000

Expenses

COGS 800

Depreciation Expense 100

Rent Expense  50

Interest Expense 360Loss on sale of machine 100

 Net income 590

Kocian Co.Balance Sheet

December 31, 2010 ($ in thousands)

Assets  2010 2009  Liabilities  2010 2009 

Cash 3,615 5,695 Account payable 0  800

Account Receivable 2,000 150 Accrued liabilities 0  50

Inventory 300 100 Interest payable 180 0

 Prepaid Rent 175 125  Non-Current Liability

 Non-Current Assets

 Note payable 3,000 0

 Equipment 4,000 0   Total Liability 3,180 850Less: AccumulatedDepreciation (100)   Shareholders’ Equity Machine 0 1,000   Share Capital  7,000 5,000Less: AccumulatedDepreciation  0

 (500)   Retained earnings 810 720

Less: Treasury stock (1,000) 0Total shareholders'

equity 6,810 5,720

Total asset 9,990 6,570

Total Liability &

Shareholders’ Equity 9,990 6,570

Additional Information: The machine was sold on Jan. 1st. 2010The maturity of the note payable issued in 2010 is 2 years. No noncash investing activity in 2010. No noncash financing activity in 2010. 

Required: Prepare a statement of cash flows for the year ending December 31, 2010using INDIRECT method.

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Question 6 (11 marks)

BB Co. is a food wholesaler that uses a perpetual inventory system for all of its food products. The first-in, first-out (FIFO) method of inventory valuation is used.

Transactions and other related information on coffee carried out by BB Co. are given below for October 2010:

Standard unit of packaging: Case containing 24, one-pound jarsInventory 1 Oct 2010: 1,000 cases @ $60.20 per casePurchases: (1) 10 Oct – 1,600 cases @$62.10 per case

(2) 20 Oct – 2,400 cases @$64.00 per case

October sales: (1) 17 Oct – 1,500 cases @ $75 sale price per case(2) 27 Oct – 1,200 cases @ $76 sale price per case

Returns and allowances: On 28 Oct, a customer returned 50 cases sold on 27 Octthat had been damaged in transit. The customer’s accountwas credited for $3,800

Required:

1)  Assuming no shrinkages, calculate (a) the number of cases in ending inventory as of31 Oct; (b) the ending inventory cost as of 31 Oct; and (c) the cost of goods sold inOctober.

2) Calculate the ending inventory cost if the LIFO method were applied instead.

3) BB paid the supplier the full amount on 18 Oct for the purchases made on 10 Oct.Record the journals for the purchases made on 10 Oct and the payment made on 18Oct.

4) Record the journal for the sales returns and allowances on 28 Oct.

5) Assume that inventory net realizable value at 31 Oct 2010 is $56 per case.

Record the journal to apply the lower of cost or net realizable value rule.

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Question 7 (18 marks) 

The financial statements of CW Co. for the years ended December 31 are provided below:CW Co.

Income StatementsFor the Year Ended December 31 (in $ thousands)

2007 2006

Net sales 534,000 326,000

Cost of goods sold (477,000) (296,000)

Gross Profit 57,000 30,000

Selling and distribution expenses (3,000) (1,000)

General and administrative expenses (37,000) (18,000)

Operating Income 17,000 11,000

Other income 18,000 20,000

Interest income 5,000 1,000

Interest expense (4,000) (2,000)

Profit before tax 36,000 30,000Tax expense (3,600) (6,000)

Net Profit After tax 32,400 24,000

Earnings per share $6.65 $5.90

CW Co.Balance Sheets

 As at December 31 (in $ thousands)2007 2006

 Assets  Current assetsCash and cash equivalents 51,000 41,000

 Accounts receivable-net 130,000 83,000Inventories 1,000 2,000Other current assets (less liquid than inventories) 1,000 0Non-current assetsProperty plant and equipment 220,000 85,000Intangible assets 28,000 29.000Long term investments 24,000 21,000Financial assets 32,000 41,000Non-current receivables 4,000 2,400Other non-current assets 1,000 1,000Total assets 492,000 305,400

Liabilities and Shareholders' Equity  Current liabilities  

 Accounts payable 105,000 67,000Financial liabilities 37,000 6,000Tax payable 7,000 16,000Other payables and accruals 8,000 8,000Long term liabilitiesFinancial liabilities 97,000 32,400Other long term liabilities 36,000 39,000Total liabilities 288,000 168,400Common Share capital 149,000 65,000Retained earnings/Reserves 55,000 72,000Total equity 204,000 137,000

Total liabilities and Shareholders' equity 492,000 305,400

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 The answer to each question is independent and should not affect the answers to thenext questions. Calculate all ratios up to four decimal places.

Required:

1) Has CW Co.’s ability to meet the short term and long term liabilities improved orworsened between the years 2007 and 2006? Use four appropriate financial ratios tosupport your answers. Explain the asset or liability items that contribute to the changein financial ratios.

2)  If the accounts receivable for 2007 is to include additional write-offs of $500k andadditional allowance of $600k, recalculate the ratios in part (1) for 2007 that areimpacted.

3) One single large customer TQ accounts for 60% of the sales in both years 2007 and2006. The gross profit margin of sales to TQ is 15%.

What is the gross profit margin of sales to the remaining customers for 2007(excluding TQ)? Discuss the implication to CW Co.’s profitability if TQ were to stopdealing with CW Co.

4) Use vertical analysis of income statements for the years 2006 and 2007 and explainthe items that contribute to the change in profitability from 2006 to 2007.

5) How well is CW able to generate returns from its assets and shareholder’s equity inthe year 2007? Calculate two appropriate financial ratios.

Is the return to shareholders higher or lower than the return to creditors?

The End

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Solutions:

MCQ

1. D2. C3. C4. D5. A6. C7. C8. B9. D

10. A

1-5: DC C DA6-10: CCB DA

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Question 1

Dr Cra) Cost of goods sold (or Inventory write-down

expense)

15,000

Inventory 15,000

 b) Salary Expense 1,506*Salary Payable 1,506

*note: 2510 x 3/5 = 1506 for Mon-Wed accrued salary

c) Office Equipment 6,000*General office expense 6,000

*Note: correcting for error

Depreciation expense 5,400*Accumulated depreciation for Officeequipment

5,400

* (56,000 – 2,000)/10 = 5400

d) Depreciation expense 13,800*Accumulated Depreciation for DemonstrationEquipment

13,800

* 46,000 x 2/5 x 9/12 = 13,800

e) Interest expense 500*Interest payable 500

* 50,000 x 12% x 1/12 = 500

f) Warranty expense 10,558Provision for Warranty Repairs 10,558

g) Accounts payable 10,000*Cash 10,000

* note: correcting errorh) Rent expense 6,000*

Prepaid rent 6,000

*(16,000 /2) x 9/12 = 6,000

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 i) Allowance for uncollectible accounts 7,700

Accounts receivable 7,700

Uncollectible account expense 9,900*Allowance for uncollectible accounts 9,900

*Desired ending balance in Allowance = $100,000 x 0.5% + 150,000 x 1%+ 100,000 x 4% + 50,000 x 10% = $11,000Uncollectible expense = $11,000 - (8800-7700) = $9900

 j. Retained earnings 12,500Dividend payable - Ordinary Share 10,000*Dividend payable - Preference Share 2,500**

*100,000 x 0.1 **5% x 50,000 = $12500

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Question 2

1)

Cash 1,845,760*Discount on Bonds Payable 154,240

Bonds Payable 2,000,000

* price:

$2,000,000 x 0.614 (n=10, i=5%) 1,228,000

$80,000 x 7.722 (n=10, i=5%) 617,760

Issue price 1,845,760

2) June 30, Year 1

Interest expense ($1,845,760 x 0.05) 92,288Cash ($2,000,000 x 0.04) 80,000Discount on Bonds Payable 12,288

Dec 31, Year 1

Interest expense (($1,845,760 + 12,288) x 0.05) 92,902Cash ($2,000,000 x 0.04) 80,000Discount on Bonds Payable 12,902

3) Long term liabilities

Bonds Payable $2,000,000Less Discount on Bonds Payable* 129,050

$1,870,950

*154240 – 12288 – 12902 = 129,050

4) Purchase price for the retired bonds = $2000000 x 1.1 x 0.2 = $440,000

Bonds Payable (20% x $2000,000) $400,000Loss on Repurchase of Bonds 65,810

Discounts on Bonds Payable (129,050 x 0.2) 25,810Cash 440,000

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Question 3

PART A:

1) ($16,000+1,500+500+1,000+600+400) - $2,000 = $18,000

2) Dep. Exp. for 2008 = $18,000 / 10yrs * ½ = $900Book value as at Dec. 31, 2008 = ($20,000 – $900) = $19,100

3) DR Cash 23,000DR Accumulated Depreciation 900

CR Equipment 20,000CR Gain on Sale 3,900

PART B:

1) Dep. Exp. for 2009 = ($22,000+900-2,000) / 9.5yrs = $2,200

2) Dep. Exp. for 2010 = {($22,000+900-2,200)-$1,000} / 5yrs = $3,940

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Question 4

Question 4

1). Solve for the four unknowns (A to D) in the table aboveA=61,000B=84,000C=84,000D=35,000

2)

a. record uncollectible account expenseDr uncollectible account expense $20,000

Cr allowance $20,000

 b. write off uncollectible accountsDr allowance $16,000

Cr account receivables $16,000

3)  Dr uncollectible account expense $16,000Cr account receivables $16,000

4) 

a) net account receivable= gross account receivable – allowance= $810,000allowance=$90,000

gross account receivable= $90,000/10%=$900,000

 b). Partial balance sheet

Account receivables $900,000LESS: allowance $90,000 Net account receivables $810,000

Question 5

Part A:

1. A2. A3. C4. B5. C6. C7. A8. C

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 Part B

Kocian Co.Cash flow statement

For the Year Ended December 31, 2010 

Operating (1,980)Net income 590

Depreciation Expense 100Loss of sale of machine 100Increase in Account Receivable (1,850)

Increase in Inventory. (200)Increase in Prepaid Rent (50)Decrease in Account Payable (800)Decrease in Accrued liabilities (50)Increase in Interest Payable 180

Investing (3,600)Purchase of equipment (4,000)Sale of Machine 400

Financing 3,500

Proceeds from sale of common stock 2,000Proceeds from issuing note 3,000Dividend payment (500)Purchase of Treasury share (1,000)

Net Cash Flows for the period (2,080)Beginning cash balance 5,695Ending balance 3,615

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Question 6

1.   Number of cases in ending inventory = 1000 + 1600 + 2400 – 1500 – 1200 + 50 =2350

Cost of goods sold = 1000*$60.20 + 500*$62.10 + 1100*$62.10 + 50*$64 = $162,760

Ending inventory cost as of 31 Oct = 2350*$64 = $150,400

2. Ending inventory cost = 1000@ $60.20 + 100@ $62.10 + 1250@ $64 = $146,410

3.  Journals

10 Oct Dr Inventory(1600*$62.1) $99360Cr Accounts payable $99360

18 Oct Dr Accounts payable $99360Cr Cash $99360

4.  Journal28 Oct Dr Sales return (50*$76) $3800

Cr Accounts receivable $3800

Dr Inventory (50*$64) $3200Cr Cost of goods sold $3200

5.Ending inventory unit cost = $64 Net realizable value = $56Amount to mark down = (64-56)*2350 = $18800

Journal:Dr Inventory write-down expense or COGS $18800

Cr Inventory $18800

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Question 7

1)2007:

Current ratio = (51,000+130,000+1,000+1,000)/(105,000+37,000+7,000+8,000) =1.1656Acid test ratio = (51,000+130,000)/(105,000+37,000+7,000+8,000) = 1.1529Debt ratio = 288,000/492,000 = 58.54%Times interest earned = 17,000/4,000 = 4.25

2006:Current ratio = (41,000+83,000+2,000)/(67,000+6,000+16,000+8,000) = 1.2990Acid test ratio = (41,000+83,000)/(67,000+6,000+16,000+8,000) = 1.2784Debt ratio = 168,400/305,400 = 55.14%

Times interest earned = 11,000/2,000 = 5.5

The ability to pay short term debt has worsened from 2006 to 2007. This is shown fromthe drop in current ratios and acid test ratios. The accounts payable and financialliabilities have increased at a higher rate than that of the accounts receivable and cash.

The ability to pay long term debt has worsened from 2006 to 2007. The debt ratio hasincreased while the times interest earned ratio have dropped. The increase in accounts payable and financial liabilities (both short and long term) resulted in a higher debt ratio.The interest expense has doubled but not the income from operations. This caused the

drop in times interest earned.

2) Write-off will debit allowance and credit accounts receivable. No impact to netaccount receivable. No impact to the 4 ratios.

Additional allowance reduces net accounts receivable to $129,400k for 2007.

Revised ratios for 2007:Current ratio = (51,000+129,400+1,000+1,000)/(105,000+37,000+7,000+8,000) =1.1618

Acid test ratio = (51,000+129,400)/(105,000+37,000+7,000+8,000) = 1.1490

Debt ratio = 288000/491400 = 0.5861

Times interest earned = (57,000 – 37,000-3,000- 600)/(4,000) = 4.1

4)  2007:

Sales to TQ = $534000 * 60% = $320,400COGS to TQ = (1-0.15) * 320,400 = $272,340

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Sales to remaining customers = $213,600COGS to remaining customers = $477,000 - $272,340 = $204,660Gross profit to remaining customers = $8940Gross profit margin to remaining customers = 8940/213600 = 4.1854%

If TQ were to stop dealing with CW, the gross profit drops drastically to $8940 and net profit turns into a net loss. This is because the gross profit margin to other customers isonly 4.1854%.

4)As % net sales:COGS: 2007 (477/534 = 89.33%); 2006 (296/326 = 90.8%)Gross profit margin: 2007 (57/534 = 10.67%); 2006 (30/326 = 9.20%)General & admin expense: 2007 (37/534 = 6.93%); 2006 (18/326 = 5.52%)Other income: 2007 (18/534 = 3.37%); 2006 (20/326 = 6.14%)

 Net profit after tax: 2007 (32.4/534 = 6.07%); 2006 (24/326 = 7.36%)

The net profit margin declines from 7.36% in 2006 to 6.07% in 2007 largely due to theincrease in the proportion of general and admin expenses (from 5.52% in 2006 to 6.93%in 2007) as well as the drop in other income from 6.14% in 2006 to 3.37% in 2007, partlymitigated by the increase in gross profit margin from 9.2% in 2006 to 10.67% in 2007(the latter from the drop in COGS from 90.8% of net sales in 2006 to 89.33% in 2007).

5)Return to shareholder: 2007 (32.4/(204+137)/2 = 19.00%; 2006 (24/137 = 17.52%)ROA: 2007 (32.4+4)/(492+305.4)/2 = 9.13%; 2006 (24+2)/305.4 = 8.51%

CW is able to generate 18 or 19 cents return to every dollar of shareholder investment –relatively good return. CW is able to generate 8 cents return to every dollar of assetutilized.

Where return to shareholder > return to total assets, return to shareholder is higher thanreturn to creditors.