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ACCT1005
Principles of Accounting I
SEMESTER 1 EXAMINATION, 2020-2021
Question 1 (20 marks)
The Reed Company has fiscal year on December 31 and its financial statements are prepared on an annual basis. However, the accounting records are damaged accidently. For the fiscal year ended on December 31, 2020, only the unadjusted trial balance and the statement of financial position on December 31 are currently available. Please try to restore other parts of the accounting records using the currently available information. The change in Accounts Receivables totally comes from providing service to customers.
Unadjusted Trial Balance
Accounts Payable 7,000
Accounts Receivable 1,540
Accumulated Depreciation-Equip. 9,100
Cash 42,000
Depreciation Expense 0
Dividends 7,700
Equipment 52,500
Insurance Expense 0
Prepaid Insurance 12,460
Prepaid Rent 10,500
Retained Earnings 36,540
Rent Expense 0
Salaries and Wages Expense 26,600
Salaries and Wages Payable 0
Service Revenue 67,200
Share Capital-Ordinary 21,000
Supplies 2,240
Supplies Expense 1,400
Unearned Service Revenue 16,100
Reed Company
Statement of Financial Position
December 31, 2020
Assets
Property, plant, and equipment
Equipment………………………………………………………………………….. $ 52,500
Less: Accumulated depreciation−equipment…………………………… (11,900) $ 40,600
Current assets
Prepaid insurance ………………………………………………………………… 1,050
Prepaid Rent……………………………………………………………………….. 7,000
Supplies …………………………………………………………………………….. 490
Accounts receivable …………………………………………………………….. 2,240
Cash…………………………………………………………………………………… 42,000 52,780
Total assets…………………………………………………………………… $93,380
Equity and Liabilities
Equity
Share capital-ordinary………………………………………………………….. $21,000
Retained earnings………………………………………………………………… 49,980 $70,980
Current liabilities
Accounts payable ………………………………………………………………… 7,000
Unearned Service Revenue …………………………………………………… 10,500
Salaries and Wages payable………………………………………………….. 4,900 22,400
Total equity and liabilities …………………………………………….. $93,380
Required:
(a) Based the information given above, prepare adjusting entries for the Reed Company on December 31, 2020. You may omit descriptions for the journal entries. (7 marks)
(b) Based on the information given above, prepare the income statement for Reed Company on December 31, 2020. (4 marks)
(c) Based on the information given above, prepare the closing entries for the Reed Company on December 31, 2020. You may omit descriptions for the journal entries. (4 marks)
(d) Originally, the insurance expense was mistakenly omitted and thus the expenses were greatly understated and the income was much higher than the current number. The error was identified and corrected using an correcting entry by the accountant. However, when the president of Reed Company prefers the original income and requires the accountant to remove the adjusting for insurance.
(i) Who are the stakeholders in this situation? (2 marks)
(ii) Which accounting principles might be violated in this situation? Explain the effects on financial statements of the requirement by the president. (3 marks)
Question 2 (Total 17 marks)
Part A
ABC Company completed the following transactions in April, assume the perpetual inventory system was used :
Required
Prepare the journal entry for the
(a) Apr 18 sale, the merchandise sold had a cost of $4,200.
(b) Apr 24, sales return, the merchandise returned had a cost of $240.
(c) Apr 28 collection of cash from customer . (6 marks)
Part B
DEF Ltd uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows:
Jan 1 Beginning inventory……………………………… 300 units @ $6.50 = $ 1,950
Mar 18 Purchase ……………………………………………… 1,100 units @ $7.50 = 8,250
Jul 31 Purchase ……………………………………………… 1,500 units @ $7.80 = 11,700
Dec 26 Purchase ……………………………………………… 1,100 units @ $8.50 = 9,350
Total available for sale in year…………….. 4,000 units $31,250
At December 31, the ending inventory of this product consisted of 1,450 units. Determine the cost of the year-end inventory and the cost of goods sold for this product under each of the following methods of inventory valuation:
(a) First-in, first-out;
(b) Average cost (round your answers to the nearest dollar). (6 marks)
Part C
Briefly explain ANY TWO factors to determine the following inventory system being used: (i) Perpetual inventory system; (ii) Periodic inventory system. (5 marks)
Question 3 (Total 20 marks)
Part A
Banana Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 3.6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 20X0, and December 31, 20X1, appear below:
12/31/20X0 12/31/20X1
Net Credit Sales $850,000 $960,000
Accounts Receivable 640,000 750,000
Allowance for Doubtful Accounts 12,000 ?
Required
(a) Prepare the journal entries and record the following events in 20X1.
Jun. 15 Determined that the account of Albert Wong for $2,750 is uncollectible.
July. 09 Determined that the account of Kenneth Chan for $6,750 is uncollectible.
Sep. 10 Received a check for $1,550 as payment on account from Albert Wong, whose account had previously been written off as uncollectible. He indicated the remainder of his account would be paid in December.
Dec. 02 Received a check for $1,200 from Albert Wong as payment on his account. (2 marks)
(b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 20X1. (1 marks)
(c) What is the balance of Allowance for Doubtful Accounts at December 31, 20X1? (2 marks)
Part B
Pear Company has the following transactions related to notes receivable during the last 2 months of 20X0.
Nov. 1 Loaned $45,000 cash to Sara Lui on a 1-year, 5% note.
Dec. 11 Sold goods to Magic World Limited, receiving a $65,000, 90-day, 6.5% note.
16 Received an $12,500, 6-month, 7% note in exchange for Good Bullet Company’s outstanding accounts receivable.
31 Accrued interest revenue on all notes receivable.
Required:
(a) Journalize the transactions for Pear Company. (2 marks)
(b) Record the collection of the Sara Lui’s note at its maturity in 20X1. (3 marks)
Part C
You are the accounting manager of Orange Company. One day, the CEO of the company talked to you that he could not understand why cash realizable value does not decrease when an uncollectible account is written off under the allowance method.
Besides, the CEO also wanted the accounting department to be less restrictive in granting credit to customers. “How can our sales managers sell anything when you guys won’t approve granting more credit to our customers?”
Required:
(a) Clarify the point regarding the question raised by the CEO in the first paragraph. (2 marks)
(b) Respond to the CEO’s comment in the second paragraph by indicating the advantages and disadvantages of easy credit and the corresponding accounting implications. (3 marks)
Part D
On December 31, 20X0, Coco Company issued $300,000, 5%, 6-year bonds for $271,400.80. The bonds were sold to yield an effective-interest rate of 7%. Interest is paid annually on December 31.
The company uses the effective-interest method of amortization.
Required:
(a) Prepare a bond discount amortization schedule which shows the amortization of discount for the first two interest payment dates. (Round to the nearest dollar.) (2 marks)
(b) Prepare the journal entries that Coco Company would make on December 31, 20X0, and December 31, 20X1, and December 31, 20X2 related to the bond issue. (3 marks)
Question 4 (Total 16 marks)
The Guotai Corporation has a fiscal year end of Dec 31. The partial statement of financial position for the fiscal year 2018 is shown below
Equity
Share capital–ordinary, $1 par, 700,000 shares authorized, 400,000
shares issued $400,000
Share premium–ordinary 700,000
Retained earnings 400,000
Total equity $1,500,000
In the fiscal year 2019, the following equity transactions happened:
Apr. 21 Issued 80,000 ordinary shares at $5 per share.
Jul. 15 Repurchased 28,000 ordinary shares of its own at $4 per share to be held in the treasury.
Oct. 3 Reissued 11,000 treasury shares for $4.5 per share.
Required:
(a) Prepare the journal entries to record the above equity transactions in 2019. (5 marks)
(b) The net income for the fiscal year 2019 of Guotai Corporation is $200,000. In 2019, the Guotai Corporation does not pay any dividends. Prepare the equity section of the statement of financial position for Guotai Corporation on Dec 31, 2019. (6 marks)
(c) Discuss what is the impact of cash dividend, share dividend, and stock split on the marketability of a firm’s shares. (5 marks)
Question 5 (Total 10 marks)
On June 30, 2019, the cash account of BAC Co. showed a ledger balance of $15,879.40. In the May 31, 2019 bank reconciliation of BAC Co. shows three outstanding checks: no. 122, $544.20; no.130, $1,900; no. 131, $ 1,400.
The bank statement as of June 30, 2019 showed a balance of $16,600.
The June bank statement (check payment section only) and the June cash payments information show the following. All purchases from suppliers are on account.
Upon comparing the statement of cash records, the following facts were determined.
1. There were bank service charges for June of $100.
2. A bank credit memo stated that Mr. Chen’s note for $4,800 and interest of $144 had been collected on June 29, and the bank had made a charge of $22 on the collection.
3. $13,560 deposit of transit in June 30 were not deposited until July 2.
4. Checks outstanding on June 30 totaled ?.
5. The bank had charged the BAC Co.’s account for a non-sufficient fund customer’s check amounting to $1,012.80 on June 29.
6. A customer’s check for $360 (sales on account) had been entered as $240 in the cash receipts book journal by BAC on June 15.
7. Regarding the check payment information, the bank did not make any errors, but BAC Co. made two errors. Please adjust the errors as well.
Required:
Prepare a bank reconciliation at June 30, 2019. (10 marks)
Question 6 (Total 17 marks)
ABC Company (ABC) is an express logistic service provider. The company owns two trucks as follow.
Truck No. Date of acquisition Acquisition cost US$
1. January 1, 2016 70,000
2. July 1, 2016 50,000
3. January 1, 2018 60,000
4. July 1, 2019 48,000
Balance as per January 1,2020 228,000
The company adopts double-declining balance depreciation method, based on a 10-year life with no residual value. During a financial statement review in 2020, you noticed the following three transactions between January 1, 2020 and December 31, 2020 which were recorded in the ledger.
(i) On January 1, 2020, ABC revised the expected useful life of Truck no. 3 to 8 years and with residual value of $1,000. On December 31, 2020, the accounting entry was a debit to depreciation $8,000 and credit accumulated depreciation $8,000.
(ii) On March 1, 2020, ABC sold Truck No. 2. with $13,000. The disposal entry was a debit to Cash $13,000 and a credit to Trucks $13,000.
(iii) On July 1, 2020, Truck No. 1 was sold for $27,000 cash, entry debited Cash $27,000 and credited Trucks, $27,000.
Required:
a) Prepare the correcting entries for (i) to (iii). Round your answers to the nearest dollar. Explain (i) to (iii) separately the effect on income statement and statement of financial statement arising from the above errors. (12 marks)
b) Assume ABC acquired new building on January 1, 2020, for $8,900,000 with cash. ABC elects to value the building using revaluation accounting. The building is being depreciated on a straight-line basis over its 20 years useful life and no residual value. On December 31, 2020, the fair value of the building is determined to be $10,000,000. Up to December 31, 2020, you only found the annual depreciation entry of debited Accumulated Depreciation $500,00 and credited Depreciation $500,000 related to this building. Prepare (i) the correcting entry for the depreciation and (ii) all the necessary journal entries related to this building in 2020 (except annual depreciation). (5 marks)
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