ACCT1005

Principles of Accounting I

SEMESTER 1 TAKE HOME EXAMINATION, 2019-2020

Question 1 (Total 22 marks)

Smart Play Service has fiscal year end on December 31 and prepares annual financial statements. At the end of the 2019, its trial balance before adjustment on December 31 is as follows.

Smart Play Service

Trial Balance

December 31, 2019

The following information is available to the accountant:

1.   A physical count of supplies on December 31 shows that the value of supplies on hand equals to 100×(the sum of the last three digits of your student ID). [For example, if your student ID number is 19123450, then the value is 100×(4+5+0)=$900]

2.   Annual depreciation for the buildings is $3,000. All the equipment the company owns was purchased on June 1, 2019 and are estimated to have 5 years of useful life with no residual value. The firm uses straight-line depreciation method.

3.   Insurance policy is a 2-year policy starting May 1, 2019.

4.   Forty percent of unearned service revenue is earned in 2019.

5.   The notes payable was borrowed on August 31, 2018, with a maturity date on August 31, 2028, and interest rate of 8%.

6.   For the Accounts  Receivable balance, you have the  following information based  on manager estimation:

Required:

(a) Prepare adjusting  entries  for  Smart Play Service on December 31 2019. You may omit descriptions for the journal entries.  (6 marks)

(b) Prepare the closing entries for  Smart Play Service  on December 31 2019. You may omit descriptions for the journal entries.  (2 marks)

(c) Prepare the income statement for 2019 fiscal year, and a classified statement of financial position on December 31 2019.  (6 marks)

(d) For a firm that prepares annual financial statements, describe the formal accounting cycle of the firm. Specifically, 1) in chronological order, list the formal steps involved in the financial reporting  process within a complete fiscal year; and 2) identify the document or file accountants use or create in each step, if any. Please limit your answer to 250 words. (8 marks)

Question 2 (Total 20 marks)

Part A

Savoury Company's bank statement for the month of September showed a balance per bank of €4,150. The company's Cash account in the general ledger had a balance of €3,969.85 at September 30. Other information is as follows:

(1)   Cash receipts  for  September  30  recorded  on  the  company's  books  were  €3,390  but  this amount does not appear on the bank statement, until October 2.

(2)   The bank statement shows a debit memorandum for €25 for check printing charges.

(3)   Check no. 119 in the amount of $491 had been entered in the cash journal as $419, and check no. 120 in the amount of $58.20 had been entered as $582. Both checks had been issued to pay for purchases on account on September 13 and 14.

(4)   The total amount of checks still outstanding at September 30 amounted to €2,136.05.

(5)   A customer’s  check for  $90  (payment on  account) had been  entered  as  $60  in the cash receipts journal by Savoury Company on September 15.

(6)   The bank returned an NSF check from a customer for €253.20.

(7)   The bank included a credit memorandum for €1,230.50 which represents collection of a customer's note by the bank for the company; principal amount of the note was €1,200 and interest was €36 and bank had made a charge of $5.50 on the collection. Interest has not been accrued.

Required:

(a) Prepare a bank reconciliation for Savoury Company at September 30.  (3 marks)

(b) Prepare any adjusting entries necessary as a result of the bank reconciliation. Omit descriptions for the journal entries.  (2 marks)

Question 2 (Continued)

Part B

Senior Company purchased equipment on January 1, 2019 for $135,000. It is estimated that the equipment will have a $7,500 residual value at the end of its 5-year useful life. It is also estimated that the equipment will produce 150,000 units over its 5-year life.

Required:

Answer the following independent questions.

(a)   Compute the amount of depreciation expense for the year ended December 31, 2019,using the straight-line method of depreciation. (1 marks)

(b)   If 24,000 units of product are produced in 2019 and 36,000 units are produced in 2020, what

is the book value of the equipment at December 31, 2020? The company uses the units-of- activity depreciation method.  (2 marks)

(c)  If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2022? (2marks)

Part C

Benny has worked for Lau & Lee Co., a local law firm for several years. He is an associate and needs to work long hours. He hasn't taken a vacation in the last three years. Benny is responsible for opening the mail and listing the checks received. He also takes cash from clients after their visits. Sometimes Benny doesn't bother giving each client a receipt for the cash received from their accounts. When he is free, he offers his help to the firm’s accountant to post the cash receipts to the clients' accounts receivable and the accountant is happy with his help.

Required:

Explain and illustrate how the principles of internal control maybe violated in this law firm. Please limit your answer to 250 words.  (5 marks)

Part D

You are the accounting manager of Banana Supermarket. One day, the CEO of the supermarket told you “Our supermarket needs internal controls because we cannot trust our employees.”

Required:

Do you agree? Why? How internal control concepts could be applied to the supermarket. Explain and illustrate your answer with example(s). Please limit your answer to 250 words.  (5 marks)

Question 3 (Total 18 marks)

Part A

Peter, Paul and Mary are partners in providing Wedding Ceremony services.  In 2019, the beginning- year capital balances are $240,000, $120,000, and $120,000, respectively. Partnership net income for the year is  $168,000. Make the necessary journal entry to  close Income  Summary to the  capital accounts if:

Required:

(a)  Partners agree to divide income based on their beginning-year capital balances. (2 marks)

(b)  Partners agree to divide income based on the ratio of 5:3:2 (Peter:Paul:Mary), respectively. (2 marks)

(c)  Partnership agreement is silent as to division of income and loss. (2 marks)

Part B

Thomas  Lee  is  a  branch  accountant  in  a  multinational  company  HKCP  Group  (“the  Group”) responsible for purchasing supplies from a developing country. Thomas is authorized to enter into contracts up to HK$10,000,000 for any single transaction.  Demand in the home market is growing and Head Office is pressing for an increase in supplies.  However, the supplies must be sourced at below-market prices. If not, the Group will be losing out in competition and his year-end bonus will be gone.

A new government official in the developing country says that Thomas needs an export permit from his department and that he needs a payment to be made to his sister-in-law for consulting services if the permit is to be granted.  Thomas quickly checks alternative sources and finds that the normal price combined with the extra “facilitation fee” is still much cheaper than the alternative sources of supply. Thomas faces two problems, namely, whether to pay the facilitation fee and, if so, how to record it in the accounts so it is not obvious what it is.

Required:

Discuss the problems and suggestions. Please limit your answers to 250 words.  (12 marks)

Question 4 (Total 20 marks)

ABC Education (ABC) issued $2,000,000 (Bond A), 10.5%, 10-year bonds on January 1, 2017 and pay interest annually on January 1. The effective interest rate was 10% at that time and ABC received $2,061,440.

On  September  1,  2018,  ABC  issued  $1,000,000  (Bond  B),  11%,  5-year  bonds   and  received $963,194.95.  Interest  for  this bond  is  payable  semi-annually  on  March  1  and  September  1.  The effective interest rate was  12%. The company’s financial year ends at December 31 and prepares adjusting entries semi-annually.

Required:

(a) Prepare a bond amortization schedule for the $2,000,000 bond (Bond A) from 2017 to 2021. In  your  schedule,  please   show  the   (i)  date,   (ii)  cash  paid,   (iii)  interest  expense,  (iv) amortization and (v) carrying value of the bonds. Round your answers to the nearest dollar. (2 marks)

(b) Kate, a junior accountant prepared the following three sets of journal entries to record all the

bond interest movement during the year 2020. Your supervisor, Jack asked you to review, comment and correct her works. On the basis of the explanation for each entry, please write an email to your supervisor and explain the following: (i) the reasons for Kate’s mistakes; (ii) the proper procedures to record ABC’s bonds during the bonds life and the usefulness of this information to financial statement users; (iii) the correcting journal entries to correct Kate’s mistakes; (iv) all the journal entries that Kate should prepare on December 31, 2020. Please state clearly the above headings in your email and limit your email to 450 words. Leave 2 decimal places in your calculation process.

(18 marks)

Question 5 (Total 20 marks)

Cathy Store uses a perpetual inventory system. Cathy Store had beginning inventory of 100 units, $50 each at May 1. During May 2019, Cathy Store had the following merchandising transactions.

Required:

(a) Journalize the transactions assuming Cathy Store uses the moving average-cost method. Omit descriptions for the journal entries. (7 marks)

(b) Calculate gross profit under the moving average-cost method and First-in, First-out (FIFO) method, respectively.  (3 marks)

(c) Suppose  Cathy  Store  uses  a  periodic   inventory  system  instead  and  had  200  units   of merchandise on hand on May 31 as the results of the above transactions. Assume Cathy Store  also had merchandise in transit of 100 units, $68 each shipped FOB shipping point, terms 1/10, n/30, by the  seller on May 31.  If Cathy  Store  ignored those units  in transit when taking  physical inventory on May 31, what and how financial statements will be affected under the  average-cost method and FIFO method, respectively.   (10 marks)