Engage Education Foundation

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1 2015 End of Year Seminar Exam Engage Education Foundation Units 3 and 4 Accounting Practice Exam Solutions Stop! Don t look at these solutions until you have attempted the exam. Any questions? Check the Engage website for updated solutions, then practiceexams@ee.org.au.

2 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Section A Multiple-choice questions Marks allocated are indicated by a number in square brackets, for example, [1] indicates that the line is worth one mark. Question 1a Current Assets $ $ Current Liabilities $ $ Stock Control 5000 Creditors Control/Dale's Disco 5500 GST Clearing 500 5,500 Non Current Liabilities Non Current Assets Owner's Equity Van 30,000 Capital 35,000 Less Acc. Dep of Van -1,000 29,000 Office furniture 6,000 35,000 TOTAL 40,500 TOTAL 40,500 Stock control and GST Clearing [1] Creditors Control and office furniture [1] Van [1] Correct van depreciation [1] Capital and totals [1] Question 1b Depreciation is allocated so that an accurate profit can be determined for a given reporting period. This is achieved by matching the revenue earned by an asset with the expense allocated as depreciation. Therefore those assets which contribute more to revenue at the start of their useful life should use the reducing balance method. This is because they are seen as more productive at the beginning of their useful life and less so at as the asset ages. Due to the presence of moving parts and becoming outdated quickly, the van satisfies the reducing balance method criteria. The office furniture is unlikely to become outdated or deteriorate quickly, and is thus likely to contribute to revenue evenly, therefore the straight line method is appropriate. Question 1c An asset is a resource controlled by the entity, as a result of past events, which represents the future inflow of economic benefits to the entity. GST receivable is controlled by the business as a result of the stock purchase transaction, which will result in an inflow of economic benefits when the ATO pays a GST refund to the business for a debit GST balance. Definition of an asset [1] How GST satisfies this definition [1] Page 1

3 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 2a General Ledger Subsidiary Ledger Date Details Debit Credit Debit Credit Jan 30th Sales Returns 1500 GST Clearing 150 Debtors Control 1650 Party Warehouse 1650 Stock Control 750 Cost of Sales 750 Sales returns and GST Clearing [1] Debtors Control and Party Warehouse subsidiary account [1] Stock Control and Cost of Sales [1] Question 2b Assets decrease by $900 Debtors decrease $1650, Stock increases $750 Liabilities GST decrease by $150 Owner s Equity decreases by $750 net sales decrease by $1500, net expenses decrease $750. Each of assets, liabilities and owner s equity [1] Solutions to this question continue on the next page. Page 2

4 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Question 2c General Ledger Stock Control Date Cross-reference Amount Date Cross-reference Amount 1st Jan Balance 10,500 30th Cost of Sales 1,975 Jan 30th Cost of Sales 750 Balance 9,275 Jan TOTAL 11,250 11,250 1st Feb Balance 9,275 Debit cost of sales and balance [2] Credit cost of sales [1] Subsidiary Ledger: Party Warehouse Date Cross-reference Amount Date Cross-reference Amount 1st Jan Balance 2,100 2nd Jan Bank 2,100 Sales/ GST Clearing th Jan Bank/ Discount Expense th Jan Sales/ GST Clearing 1,650 30th Jan Sales Returns/ GST Clearing 1,650 29th Jan Sales/ GST Clearing st Jan Balance 220 1st Feb Balance 220 4,520 4,520 All debit Sales/GST Clearing entries and balance [1] 2 nd Jan credit entry [1] 15 th Jan credit entry [1] Sales Returns/GST Clearing entry [1] Question 2d Debtors Balance as at 1st February 2015 Party Warehouse 220 Helium House 440 Joe's Sounds 385 Max's Markers 1,100 TOTAL 2,145 Party Warehouse entry [1] Joe s Sounds and Helium House entry and total [1] Max s Markers entry [1] Page 3

5 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 3a Item: Smart Cost Assignment Method: FIFO Watch Supplier: Andsung IN OUT BALANCE Date Dec Details QTY COST TOTAL QTY COST TOTAL QTY COST TOTAL 2015 Balance nd Memo th Inv th Rec th CR st Memo Each entry [1] Question 3b Advertising expense (as no drawings made). Question 3c Stock loss overstated [1] Advertising expense understated [1] Net profit no effect [1] Question 3d Sales: $3100 Cost of Sales: $1550 Gross Profit: $1550 Less Stock Loss: $300 Adjusted Gross Profit: $1,250 Sales and Cost of Sales [1] Stock loss [1] Profit totals [1] Question 3e $300 + $30 import charge = $330 OR $300 + $30 import charge + $3 complementary case = $333 Unit Cost: EITHER $330 OR $333 Working [1] Either correct unit cost [1] Page 4

6 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Question 3f GST not included in the cost as GST is merely held by the business then passed onto the ATO at the end of the period. GST adds no value to the asset and is not used to bring it into its condition or location ready for sale. Complementary Case EITHER: Not included due to immateriality as the relatively small cost of one case will not impact on decision making for the phones, although it can be logically allocated and is used to bring the phone into its condition for sale. OR: Included, as the cost can be logically allocated to individual units and is used bringing the phone into its condition ready for sale. Question 3g Accounting principle: Reporting period. [1] Reporting period ensures expenses reflect what has been incurred and revenues what has been earned so profit can be accurately calculated. If all units are sold, the effect on net profit will be the same as the entire cost will have been incurred. [2] If not all units sell, recording the import costs as product costs ensure only the expense that has been incurred is deducted from profit. [1] If not all units sell and the charges are treated as a period cost, net profit will be understated as some of the expense is yet to be incurred as the those units which involve the expense are yet to sell. [1] Page 5

7 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 4a Revenue $ $ Cash Sales 218,500 Credit Sales 327, ,250 Less Cost of Sales 230,000 GROSS PROFIT 316,250 Less Stock loss 5, ADJUSTED GROSS PROFIT 310, Less other expenses Bad Debts 4,400 Depreciation of Equipment 18,000 Advertising Expense 32,000 Rent Expense 154, ,650 NET PROFIT 102, Cash sales [1] Credit sales [1] Cost of sales + stock loss [1] Bad debts and totals [1] Depreciation of equipment [1] Advertising expense [1] Rent expense [1] Question 4b Financing activities are any cash flows which change the financial structure of the firm, for example a capital contribution. Question 4c [1] per method. Methods range from employment of debt collection agencies, issuing reminder messages to debtors or fees for late payments. Page 6

8 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Question 4d A discussion must be made to ensure full marks: Budgeted data must be contrasted to historical data to indicate improvement or performance. The budgeted data is presented for one month only, which is extremely limited and may not be representative of the year. To evaluate performance, profit should also be considered as an important indicator of performance. The graph however does indicate a positive result in both investing and financing activities, therefore the business owner is planning on selling some non-current assets. This is evidenced by the fact that the owner expects to receive $ from the sale of assets, but is planning to spend only $ on new assets. Also, in financing activities, the owner expects to have an inflow of $80 000, but outflows are predicted to be only $ an increase due to loans or capital contributions. The owner may be concerned due to Operating activities having more outflows than inflows, indicating instability from day-to-day trading, especially since technology stores usually make numerous sales in the festive season. The owner should be aware that it is not sustainable to rely on investing and financing activities while having a negative result in operating activities. It is vital that the budget period be extended beyond the limited one-month forecast so that the owner has a better idea of future cash performance. Budgeted Income Statements should also be prepared before making further comment on the performance of the business. Page 7

9 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 5a Accrual accounting is a system that recognizes transactions when they occur, not necessarily when cash is received or paid. As such credit transactions are recognized and recorded and reported. Revenues earned are matched against expenses incurred in order to gain an accurate net profit for a reporting period. Recognising transactions when they occur [1] Recording and reporting credit transactions [1] Question 5b Date Details Debit Credit Debit Credit 30th June Stock Loss 400 Stock Control 400 Discount Expense 300 GST Clearing 30 Freight In 330 Depreciation of Delivery Van 2,600 Acc. Dep of Delivery Van 2,600 Interest Expense 2,250 Accrued Interest Expense 2,250 Rent Expense 8,000 Prepaid Rent Expense 8,000 Each correct adjustment entry [1] Solutions to this question continue on the next page. Page 8

10 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Question 5c General Ledger Subsidiary Ledger Date Details Debit Credit Debit Credit 30th June Stock Loss 400 Cost of Sales 140,000 Discount Expense 200 Freight In 2,330 Freight Out 2,500 Rent Expense 8,000 Depreciation of Delivery Van 2,600 Interest Expense 2,250 Wages Expense 66,000 Profit and Loss Summary 224,280 Stock loss and cost of sales [1] Freight out, wages expense and total [1] Discount expense and freight in [1] Rent expense [1] Interest expense [1] Van depreciation [1] Question 5d An expense is the outflow of economic benefits from the entity in the form of a reduction in assets (or an increase in liabilities) [1] which causes a reduction in Owner s Equity. [1] Discount expense meets this definition as it is a reduction in assets (debtors) which reduces Owner s Equity through discount expense as less is received from debtors. [1] Question 5e Accounting Principle: Reporting period this involves dividing the business s life into reporting periods to compare revenues earned against expenses incurred within the period to determine an accurate profit figure. [1] Revenue and expense accounts need to be closed off to reset them to zero in anticipation of the next reporting period. [1] These accounts are reset so only those revenues/expenses which were earned/incurred within the current reporting period are included when calculating profit. [1] Page 9

11 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 6 Profit and Loss Summary Date Cross-reference Amount Date Cross-reference Amount 30th June Expense Accounts $78,900 30th June Revenue Accounts $51,400 Capital $27,500 $78,900 $78,900 Revenue credit, totals and date [1] Expense debit [1] Capital credit [1] Page 10

12 Units 3 and 4 Accounting: End of Year Seminar Exam The Engage Education Foundation Question 7a Cash Payments Journal Date Details Chq. Bank Wages Stock January No. Control 10th Wages 12 27,000 27,000 Each entry [1] Sundries Accrued Wages 12 10,800 10,800 GST Question 7b Name of ledger Increase/Decrease/No Effect Amount account Assets Bank Decrease 37,800 Liabilities Accrued Wages Decrease 10,800 Owner's Equity Wages expense Decrease 27,000 Each of assets, liabilities and owner s equity [1] Page 11

13 The Engage Education Foundation Units 3 and 4 Accounting: End of Year Seminar Exam Question 8a Hold less stock on hand. Purchase more expensive stock without altering sales prices. Increase advertising. [1] for each measure, 2 needed. Question 8b Reducing the stock turnover merely means holding on average less stock on hand or purchasing more expensive stock. An improvement can indicate an increase in sales, as less stock is on hand due to its sale. Similarly les stock on hand can improve profit due to decreased stock losses or write downs. However a decrease in Stock Turnover may be prompted by increasing cost of sales expense which detracts from gross profit. Therefore the owner must consider other indicators to determine an increase in profit. Each point considered [1] Question 8c Positive impact: A lower stock turnover indicates stock is being converted into sales faster, thus sales may have increased. Negative impact: Due to less stock on hand the business may lose discounts on bulk stock purchases, or may lose sales due to less stock variety on hand. May not have enough stock on hand to fulfill consumer demand. Each impact [1] Question 8d Positive impact: As the business is taking longer to repay creditors, the cash on hand can be used for a longer period of time by the business to generate profit. Negative impact: Taking too long to repay creditors can reduce the business s credit rating, which may impact on future credit purchases. May also result in late fees for overdue accounts. Each impact [1] Page 12