B301 Company Accounting
Specimen Examination August 2002 (For
re-sit students)
PART A (40 marks)
Answer ANY FOUR questions out of five questions in this part. Each question carries 10 marks. You should not spend more than an hour on Part A.
Question 1 (10 marks)
Explain the accounting treatment of the following properties based on HKSSAP:
a. properties held for own use
b. properties held for its investment potential
c. properties in the course of development or redevelopment held for resale
d. properties held for production purpose.
Question 2 (10 marks)
1. Use an example to illustrate what hedging is based on what you learned in this course.
2. How does temporal method works in translating foreign currency financial statements? What are the shortcomings of using the temporal method?
Question 3 (10 marks)
Compare the proportionate consolidation method with the equity method in accounting for investment in an unincorporated joint venture.
Question 4 (10 marks)
According to HKSSAP 8, contingent loss should be accrued when certain conditions are met while contingent gains should not be accrued unless they are likely to be realized. For each of the following situation with regard to Excellent Limited, briefly explain its accounting treatment assuming the financial year for Excellent ended on March 31:
a. A customer is suing the company for $200,000 in damages because her child was injured when riding on the skateboard manufactured by the company. Legal counsel feels that the child is partially at fault, but that it is probable the lawsuit will be settled for between $50,000 and $100,000, with $70,000 being the most likely amount.
b. The company is being sued for $10 million damages. The legal counsel of the company assessed the probability of losing the case to be 50:50.
c. On 20 February 1999, a major part of the office was destroyed by fire. The loss was estimated at $500,000, but only $300,000 of the loss was covered by insurance.
d. Notes receivables for $400,000 with a maturity date of 31 March 2000 was discounted on 6 December 2000. By 11 March 2000 it was clear that the debtor is experiencing financial difficulties.
Question 5 (10 marks)
You are recently appointed as the new assistant controller of a property development company. You discovered that your predecessor has been using the completion-of-contract method to account for construction project. What is your opinion about this method? Explain the accounting method required by the HKSSAP and the rationale behind such method.
PART B (60 marks)
Answer THREE of the four questions in this part. Each carries 20 marks). 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 (20 marks)
Long Life Limited has the following balance sheets at end of the year 31 March 2000 and 2001.
2000 2001
Fixed assets $ $
At cost 500,000 800,000
Accumulated depreciation 200,000 220,000
300,000 580,000
Current Assets
Stock 280,000
360,000
Debtors
170,000
140,000
Bank 120,000 280,000
570,000 780,000
Less current liabilities
Creditors
70,000
140,000
Proposed dividend 30,000 20,000
100,000 160,000
Net current assets 470,000 620,000
Net assets 770,000 1,200,000
Less: long term liabilities (10%
debenture) -- 200,000
770,000 500,000
======= =======
Share capital (ordinary shares at $1 each) 500,000 600,000
Share premium account 100,000 150,000
General reserves 50,000 100,000
Retained profits 120,000 150,000
770,000 1,000,000
======= =========
Other relevant facts:
² Final dividend proposed for 2000 was paid in full on 1 June 2001
² During the year 2001 a fixed asset was disposed for $90,000 and its original cost was $100,000 and had been depreciated by $30,000. The profit on disposal had been recorded in the profit and loss account.
Required:
a. Prepare a cash-flow statement for the year ended 31 March 2001 using the indirect method.
b. What financing and investing activities do not involve cash? Give one example for each type of activities.
Question 7 (20 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, 1 9X6, the firm had the following balance sheet:
Cash $25,000
Accounts receivable $16,000
Less allowance for uncollectibles 1,000 15,000
Inventory 92,000
Equipment 130,000
Less accumulated depreciation 30,000 100,000
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 (20 marks)
Hwanghai Hydralic Equipment Company sells and leases its equipment to its customers. Lowu Industries Ltd. leases one of the popular products from Hwanghai on January 2, 2000. The equipment costs $340,000 to make. The standard lease terms provide for 5 annual payments of $130,000 each (excluding executory costs), with the first payment due when the lease is signed and subsequent payments due on December 31 of each year. The implicit rate of interest in the contract is 10% per year. Initial direct costs of $17,000 are incurred by Hwanghai on January 2, 2000, to obtain the lease. Lowu’s incremental borrowing rate is determined to be 12%. The equipment is very specialized. It is assumed that the machine will have no salvage value after 5 years. Assume the lease qualifies as a capital lease and a sales-type lease for lessee and lessor, respectively. Also assume that both the lessee and the lessor are on a calendar-year basis and that the lessee is aware of the lessor92s implicit interest rate.
Required:
a. Calculate the present value of the minimum lease payment.
b. Prepare all entries required on the books of Lowu to record the lease for the year 2000. The depreciation on owned equipment is computed once a year on the straight-line basis.
c. Prepare all entries required on the books of Lowu for the year 2000
Question 9 (20 marks)
Lok Shing Company92s capital structure is as follows:
31/12/2000 31/12/1999
Outstanding shares of
Ordinary shares 336,000
280,000
Nonconvertible, noncumulative,
preference shares 10,000 10,000
10% convertible bonds $1,000,000 $1,000,000
The following additional information is available:
(a) On September 1, 2000, Lok Shing sold 56,000 additional ordinary shares.
(b) Net income for the year ended December 31, 2000, was $860,000
(c) During 2000, Lok Shing declared and paid dividends of $5 per share on its preference shares.
(d) The 10% bonds are convertible into 40 ordinary shares for each $1,000 bond.
(e) Unexercised options to purchase 30,000 ordinary shares at $22.50 per share were outstanding at the beginning and end of 2000. The average market price of Lok Shing’s ordinary shares during 2000 was $36 per share.
(f) Warrants to purchase 20,000 ordinary shares at $38 per share were attached to the preference shares at the time of issuance. The warrants, which expire on December 31, 2005, were outstanding at December 31, 2000.
(g) Lok Shing92s effective income tax rate was 30% for 1999 and 2000.
Required:
a. For the year ended December 31, 2000, compute basic earnings per share figures.
b. Compute diluted earnings per share in proper order according to what you learned in B301.
c. Explain why it is important to show diluted EPS for companies with complex capital structure.