Solved by verified expert :Question 1
Mark Davies has started a
lawn mowing business (MD Lawnmowing) as a temporary job/business which he
intends to run until he starts his business degree at the University of South
Australia in four months.Mark has never owned or run a business before. To
start the business on 1 March 2014, he deposited $2,400 into a new bank account
opened in the name of the business. The $2,400 consisted of a $2000 loan from
his father and $400 of his own money. Mark rented some equipment, purchased
supplies, and hired friends to mow and trim his customer’s lawns.
At the end of each month Marksent
invoices to his customers. On 30thJune, he was ready to dissolve the business
and start hisuniversity studies. As he was so busy, he kept few records other
than his cheque book and a list of amounts owed to him by customers.
At 30June, Mark’s business
account cheque book shows a balance of $1,900, and his customers still owe him
$500. During the period, he collected $4,800 from customers. His cheque book
lists payments for supplies totalling $510, and he still has fuel and supplies
that cost a total of $65 on hand. He paid his employees $2,000, and he still
owes them $400 for their final week of work.
Mark rented some equipment
from Kennard’s Hire. On 1 April, he signed a six-month rental agreement on lawnmowers
and paid $720 for the full period. Kennard’s Hire will refund the unused
portion of the prepayment if the equipment is in good order when he returns it.
In order to get the refund, Mark has kept the equipment in excellent condition.
In fact during May paid $250 to repair one of the mowers.
To transport employees and
equipment to jobs, Mark used a trailer that he bought for $660. He believes
that the period’s work used up one-third of the trailer’s service potential.
The business cheque book lists a payment of $660 for private cash withdrawals
by Mark during the period. In JuneMark paid back a quarter of the amounthis
father had lent to him.
Mark estimates that he
spent approximately 80 hours working on the business during the period. He
plans to recommence operations on a similar basis during major breaks in his
university study and believes he will do better in later periods as he now has
an existing customer base to work from.
Required
1.
Prepare the business Income Statement for the period.
(9 marks)
2.
Prepare the classified Balance Sheet at the end of the period.
(11 marks)
3.
Was Mark’s venture successful?Give the reasons for your answer. 150 –
250 words only.
(5 marks)
Total for Question 1: 25 marks
Question 2
Harry Smith is confused about the depreciation expense in
the accounts for his shop, Kaiken, and would like you to explain the following
to him:
i) Why
is depreciation charged against the income statement for the display shelving
even though Harry believes the shelving
is worth more now than when he bought it just over two years ago?
[3 marks]
ii) Harry is considering closing the shop
in two years time and retiring. If Harry decides to go ahead with this decision
can he still charge the same amount of depreciation expense for the shop
shelving as has been done so in the past? Use the Going Concern Assumption in
answering Harry’s question.
[4 marks]
iii) If Kaiken makes a loss in any year
Harry wants to know if he still has to include depreciation expense in the
income statement?
[3 marks]
Total
for Question 2: 10 marks
Question 3
Mark Thompson submits
to you draft accounts for the year ended 30 June 2014, and a Balance Sheet as
at that date. Towards the end of the financial year his accountant resigned and
he had completed the records himself. He thinks that errors may have occurred
and asks for your help. An examination of the accounting records reveals the
following:
A.
Rent expense for the premisesincludes $660 for
July and August.
B.
A payment of $1,750 for new office furniture
has been incorrectly debited to the advertising expense account. The
furniture had been purchased on 30 June 2014.
C.
Commission due to sales representatives for the
month of June, $2,000, has been not been paid or recorded.
D.
Repairs to Mark’s private motor vehicle, $750,
have been debited to the vehicle expense account.
E.
The unearned revenue account includes an amount
of $350 for services provided during June.
F.
A fire insurance policy covering buildings was
taken out on 01 April 2014, the annual premium of $960was paid in advance
on this date and debited to the
Insuranceexpense account.
G.
Interest of $960 on the loan held by the
business was due, but has not been recorded or paid.
H.
No depreciation has been recognised for the
year ending 30 June 2014. The draft Balance Sheet shows the following:
Buildings (at cost)
$120,000
Less Accumulated Depreciation
32,000
$88,000
Office Furniture & Equipment (at cost)
20,000
Less Accumulated Depreciation
8,000
12,000
These amounts do not include any of the
transactions listed above.
Annual depreciation is to be calculated as
follows:
Buildings: 3% of cost
Office furniture and equipment: 20% of cost
Required
1.
Ignoring GST, show the journal entries required
to make the necessary adjustments/corrections listed. Make sure that your
journal entries are complete and properly formatted.
(18 marks)
2.
Calculate the effect (increase or decrease) of
each of the adjustments on the profit figure of $21,300 as shown in the
draft accounts.
(4 marks)
Total for Question 3: 22 marks
Question 4
You are provided the
following financial information for Reliance Ltd:
RELIANCE LTD
COMPARATIVE BALANCE SHEETS
AS AT JUNE 30
2013 2012
Current Assets
Cash on Hand $2500 $5000
Cash at Bank – 1200
Accounts Receivable (net) 5200 4500
Inventory 21000 19000
Prepaid Expenses 1650
30350800 30500
Non Current Assets
Plant and Equipment
76000 64000
less Acc. Depreciation (23000)53000(17600)46400
Total Assets 83350 76900
Current Liabilities
Bank Overdraft 6550 –
Accounts Payable 4100 3800
Accrued
Expenses 680 790
Tax Payable 720
120501200 5790
Non Current Liabilities
Bank Loan 25000 20000
Total Liabilities 3705025790
Net Assets 46300 51110
Equity
Share Capital 32000 26000
Retained Earnings 1430025110 4630051110
(continued over the page)
RELIANCE LTD
INCOME STATEMENT
FOR THE YEAR ENDED JUNE 30, 2014
Net Sales $92500
Cost of Sales 55200
Gross Profit: 37300
Other Revenue:
Interest Revenue 60
Discount Received 400
460
36840
Expenses:
Selling & Admin Expense
21000
Doubtful Debts Expense*
250
Depreciation Expense 5400
Interest Expense 2700 29350
Profit before tax 7490
Income tax expense 2973
Profit $ 6937
*Bad
debts written off during the year amounted to $950.
REQUIRED:
Answer this question on the separate question 3 pro forma provided.
Prepare a
Statement of Cash Flow in the format required by the applicable accounting
standard. Show all calculations in your answer.
[14 marks]
The
owners of Reliance Limited cannot understand why there is such a
difference between the profit for the period and the total cash flows.
Briefly explain some of the factors causing this difference.
[2 marks]
What
information is provided by a Statement of Cash Flow which is not provided
by other Financial Statements? (ie: Income Statement, Balance Sheet and
Statement of Changes in Equity)
[2 marks]
TOTAL FOR QUESTION 4: 18 Marks
Question 5
The following information has been extracted
from the financial statements and notes of Victorinox Ltd.
2013 2014
Sales revenue 595,125
600,300
Interest
expense 27,428 23,805
Income
tax expense 54,855 46,161
Profit
58,065 54,338
Total
assets 574,425 558,900
Total
liabilities 341,550 310,500
Ordinary
share capital 103,500
113,850
Retained
earnings 65,205 70,380
Preference
share capital 64,170 64,170
Preference
dividends paid 2,898 2,898
Required
1. Calculate the following ratios for 2014:
A. return on total assets
B. return on ordinary equity
(2
marks each)
2. Calculate the following ratios for 2013 and
2014:
A. profit margin
B. debt ratio
C. times interest earned
(A
& B = 3 marks C = 4 marks)
3. What do these ratios show in relation to the
company’s profitability and financial stability? (200 – 250 words maximum)
(5
marks)
4. What are some of the limitations or
shortcomings of ratio analysis? Give at least four different examples and
provide two or three sentences explaining each example.
(6
marks)
Total for Question 5: 25 marks
