B301 Specimen Exam August 2000

Part 1 Answer four of the following six questions. (8 marks each. Total 32 marks)

Answer ANY FOUR questions out of five questions in this part. Each question carries 8 marks. You should not spend more than an hour on Part 1.

Question 1 (8 marks)

Your company is considering leasing an machinery equipment. Explain to the CEO of the company

(a) the difference between a finance lease and an operating lease according to HKSSAP 14, and

(b) the difference in the accounting treatment of an asset between finance lease and operating lease when preparing both the balance sheet and the profit and loss account of the lessor.

Question 2 (8 marks)

Why is important to measure EPS? How should you deal with each of the following siuations when calculating EPS:

(a) the result for the year is a loss;

(b) a script (bonus) issue during the year

Question 3 (8 marks)

Explain to the new CEO of the company how accounting treatment for the following properties are different according to HKSSAP 17 and 13. Briefly discuss why.

(a) properties held for own use

(b) properties held for its investment potential

(d) properties for which decision has not been made as to its use

Question 4 (8 marks)

You are just appointed as the controller of a local company. You discovered that your predecessor has been using direct write-off method to handle uncollectible accounts. What is your opinion about this method? What alternative method would you suggest and why?

Question 5 (8 marks)

Answer the following questions in relation to foreign currency trslation:

(a) Explain what is a hedge and give an example of hedging.

(b) Explain the assumption underlying the temporal method of translating foreign currency financial statement and briefly explain how the method is carried out.

Part 2 Complete all three problems. (Total 68 marks)

Answer ALL THREE questions in this part. Begin the answer of each question on a new page. Put down the question number on the top of each page in the answer book. Do your rough work on the answer book and cross out your rough work afterwards. You may ask for supplementary answer books if you need them. Spend about two hours on this part.

Question 6 (24 marks)

The toilowing information relates to Wong Shek Nam Trading plc:

Summarized Balance Sheet as at 31 January 19X7 ($000)

Fixed assets 2,400

Investments 120

Net current assets 1,880

Total assets 4,400

Financed by:

Capital and reserves

Ordinary shares of $0.50 each fully paid 2,000

Redeemable shares of $1 each (19X7-X1) 500

Share premium 200

Revaluation surplus 400

Profit and loss account 900

Total capital 4,000

Long -term liabilities 8% debentures (19X7-Xl) 400

Total Liabilities and capital 4,400

On 1 February 1 9X7, the company closed the list of applications for 400,000 ordinary shares at a premium of $0.50. The shares were to be paid for as follows:

$0.60 on application

$0.25 on allotment

$0.15 on the first and final call to be made on 1 May.

A total of $1,320,000 was received. The shares were allotted and $1,032,000 were returned to unsuccessful applicants. The call money was received by 31 May from all shareholders, with the exception of two shareholders, one of whom had been allotted 500 shares. The other subscriber for 100 shares still owed $25 for allotment in addition to the call money. Eventually, both lots of shares were forfeited and reissued to an existing shareholder for a payment of $500 which was duly received.

At a board meeting on 15 February 1 9X7 the directors decided to make a fresh issue of 500,000 $1 redeemable shares at a premium of $0.60, and to redeem all the existing redeemable shares at a premium of $0.40. The shares had originally been issued for $1.20 each. All money due on application was duly received by 31 March 1 9X7, and the redemption took place on 6 April 19X7.

In January 19X5, the Company had purchased, for cash, 80,000 $0.25 ordinary shares in Mayfair Ltd. for $25,000, and this is included in investments on the balance sheet at 31 January 1 9X7. On 1 April 1 9X7, the Company purchased 400,000 out of a total issue of 500,000 $0.25 ordinary shares in Mayfair Ltd. by exchanging 200,000 of its own ordinary shares. The 8% debentures were redeemed on 15 May 1 9X7 at a 10% premium, and on the same date $500,000 7% debentures (19X0-X3) were issued at a discount of 5%.

Required:

Show all necessary journal entries in general journal form to record the above events, including cash! bank transactions. (Adapted, ACCA / HKSA, Advanced Accounting Practice, December 1987)

Question 7 (22 marks)

Allied Inc. is a partnership owned by three individuals, the partners share profits and losses in the ratio of 30% to Kao, 40% to Lam and 30% to Ma. On December 31, 19X6, the firm had the following balance sheet:

Cash 25,000

Accounts receivable 16,000

Less allowance for uncollectibles (1,000)

Sub-total 15,000

Inventory 92,000

Equipment 130,000

Less accumulated depreciation (30,000)

Sub-total 100,000

Total assets 232,000

Total liabilities 103,000

Kao, capital 38,000

Lam, capital 49,000

Ma, capital 42,000

Total liabilities and capital 232,000

Kao withdraws from the partnership on this date.

Required:

Record the following five independent situations in general journal format with explanations for each set ofjoumal entries, Kao~s withdrawal from the partnership under the following plans:

1. Kao gives her interest in the business to Au, her cousin.

2. In personal transactions, Kao sells her equity in the partnership to Bains and Johnson, who each pay Kao $15,000 for half her interest. Lam and Ma agree to accept Bains and Johnson as partners.

3. The partnership pays Kao cash of $5,000 and gives her a note payable for the remainder of her book equity in settlement of her partnership interest.

4. Kao receives cash of $20,000 and a note payable for $20,000 from the partnership.

5. The partners agree that the equipment is worth $150,000 and that accumulated depreciation should remain at $30,000. After the revaluation, the partnership settles with Kao by giving her cash of $10,000 and inventory for the remainder of her book equity.

Question 8 (22 marks)

The financial statements for Overmeyer Corporation for 1991 as well as the balance sheet for 1990 are as follows:

Balance Sheets as of December31 December31 1990 / 1991

Cash 100,000 / 200,000

Accounts Receivable 350,000 / 600,000

Inventory 800,000 / 1,200,000

Land 750,000 / 1,000,000

Buildings and Equipment 2,500,000 / 3,000,000

Accumulated depreciation Buildings and equipment (500,000) / (700,000)

Total assets $4,000,000 / $5,300,000

Accounts payable 500,000 / 800,000

Bonds payable 1,000,000 / 500,000

Owners' equity:

Paid-in capital 1,000,000 / 2,000,000

Retained earnings 1,500,000 / 2,000,000

Total Liabilities and capital $4,000,000 / $5,300,000

Income Statement

Sales 8,000,000

Expenses:

Cost of sales 4,800,000

Depreciation expense 200,000

Other operating expenses 2,300,000

Sub-total 7,300,000

Net income for 1991 $ 700,000

Required:

From the information contained in these statements, prepare a statement of cash flows using only the following three broad categories of activities:

(a) Cash flows from operating activities,

(b) Cash flows from financing activities,

State any assumptions that are necessary.

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