Question

Revision Questions

1.     Non-Current Assets

Provide the journal entries for the following transaction: Matthew built a new building to store supplies for his business. The builder charged $250,000, the electrician cost $10,000 and a painter cost 5,000. A compulsory fire safety inspection was conducted and cost $1,000. Matthew is still worried about the building burning down and has purchased 12 months insurance for $10,000 which covers the value of the building in case of destruction.

Matthew calculated that the above building cost $266,000 he estimates the building will last for 20 years and have a $50,000 salvage value. Calculate the depreciation expense for years 1, 2 and 3 using the Reducing-Balance method (use 2 times the straight line rate).

On the last day of year 3 Matthew sells the building for $200,000. Record the journal entry for the sale of the building.

When using the reducing balance method of depreciation, what do you do if the formula estimates a depreciation expense that would take the accumulated depreciation balance higher than the depreciable amount?

2.     Partnerships

Nabeel & Thulaisi form a partnership to offer consulting services in Sydney. Nabeel contributes $250,000 in cash, and computer equipment that he bought last year for $60,000 that has a current market value of $50,000. Thulaisi owns a building that he previously used as part of his prior sole proprietorship. He bought it for $500,000 it has a carrying amount of $400,000 and a market value of $450,000. Provide the journal entries for the formation of the partnership.

Nabeel & Thulaisi make a profit of $250,000 in their first year of operations. Their partnership agreement states that the first $200,000 of profits and losses are allocated based on current capital contributions. The remaining profits and losses are split equally. Provide the journal entries to allocate the profit distribution.

At the start of year 2 Nabeel & Thulaisi are getting too busy to keep up with the demand of their clients. The partners agree to accept Terrence’s offer to join the partnership. Terrence pays $500,000 into the partnership for a 25% share of the capital. Nabeel & Thulaisi update their partnership agreement and agree to split any capital bonus from the admission of a new partner equally. Journalise the admission of Terrence into the partnership.

3.     Shareholder’s Equity Accounting

Provide journal entries for the following transactions:

The Cheung Company issues 10 000 ordinary shares for $30 per share. The investors are required to pay $12 on application, $10 on allotment and an $8 call. Applications are received by 1^st January. Allotments are made on 14^th January with all allotment money received by 30^th January. The call was made on 1^st May and payment was due by 14^th May. On 14^th May it was discovered that a holder of 500 shares did not pay the call. The shares were forfeited and subsequently reissued at $24 per share on 30^th May. On June 1^st any remaining cash in the forfeited share reserve is refunded.

Cheung Company declared a cash dividend of $1 per share on 30^th July, recorded shareholders details on 15^th August, and paid the dividend on 1^st September.

Cheung engaged in a share buyback on 1^st December buying 500 shares at $30 each

4.     Cash Flow Statements

Prepare a cash flow statement for Anna’s Apples Ltd using the information below. Use the indirect method for operating cash flows.

Net Profit for year ended 30 June 2017: $200,000

                                                      30 June 2017                 1 July 2016

Cash                                                         ?                             $20,000

Inventory                                             $30,000                       $40,000

Accounts Payable                                $15,000                       $30,000

Unearned Revenue                              $12,000                       $15,000

Prepaid Insurance                                $18,000                       $33,000

Goodwill                                             $50,000                       $0

Equipment                                           $300,000                     450,000

Acc Dep’n Equipment                         $150,000                     $160,000

Loan Payable                                       $50,000                       $100,000

During the year equipment with a cost of $150,000 and accumulated depreciation of $50,000 was sold for $115,000. No other purchases or sales of equipment was made during the year.

During the year another business was purchased for cash.

5.     Financial statement analysis

A statement of profit or loss and a statement of financial position for Priscilla’s Pies are presented below:

Statement of profit or loss for the year ending 30 June 2017
		2017		2016
Sales		$760,000		700,000
less cost of sales		420,000		400,000
Gross profit		340,000		300,000
less expenses
Depreciation expense		$50,000		60,000
Interest expense		44,000		70,000
Other expenses		100,000		95,000
Profit before tax		146,000		75,000
Income tax expense		26,000		20,000
Net profit after tax		120,000		55,000
Statement of financial position
as at 30 June 2017
	2017		2016		2015
Cash	$40,000		$24,000		$20,000
Accounts receivable	120,000		45,000		48,000
Inventory	80,000		75,000		62,000
Equipment (net)	90,000		70,000		50,000
Motor vehicles (net)	603,000		400,000		360,000
Total assets	933,000		614,000		540,000
Accounts payable	98,000		75,000		70,000
Long term loan	250,000		75,000		65,000
Total liabilities	348,000		150,000		135,000
Ordinary shares ($1 each)	400,000		400,000		400,000
Retained earnings	185,000		64,000		5,000
Total equity	585,000		464,000		405,000
Total liabilities and equity	933,000		614,000		540,000

The share price at the end of 2017 and 2016 was $1.33 and $2.80 respectively.

The ordinary shares were issued at $1 each.

Required:

Calculate the following ratios for 2017 and 2016.

Discuss any notable trends you observe.

	Formula	2017	2016
Performance
Return on assets
Return on equity
Earnings per share
Price earnings ratio
Liquidity
Current ratio
Quick ratio
Receivables turnover
Solvency
Debt to assets
Debt to equity
Times interest earned ratio

Answer 1

5. Financial statement analysis:

	Formula	2017		2016
Performance
Return on assets	Net Income / Total Assets	120000/933000	12.86%	55000/614000	8.96%
Return on equity	Net Income / Shareholders' Equity	120000/585000	20.51%	55000/464000	11.85%
Earnings per share	Net Income / Weighted average shares outstanding	120000/400000	0.30	55000/400000	0.1375
Price earnings ratio	Market Value per share/Earning per share	1.33/0.30	4.43	2.80/	20.36
Liquidity
Current ratio	Current Assets / Current Liabilities	(40000+120000+80000)/98000	2.45	(24000+45000+75000)/75000	1.92
Quick ratio	(Current Assets - Inventory) / Current Liabilities	(40000+120000)/98000	1.63	(24000+45000)/75000	0.92
Receivables turnover	Net credit sales / Average Accounts Receivable	760000/(120000+45000)/2	2.30	700000/(45000+48000)/2	3.76
Solvency
Debt to assets	Long-term Debt / Total Assets	250000/933000	26.80%	75000/614000	12.21%
Debt to equity	Long-term Debt / Shareholders' Equity	250000/585000	42.74%	75000/464000	16.16%
Times interest earned ratio	Earning before Interest & Tax / Interest expense	(146000+44000)/44000	4.32	(75000+70000)/70000	2.07

Trends:

Performance - is getting better as compared to 2016 as the Return on assets and equity has increased in percentage terms. It is evident from the increase in Earnings per share.

Liquidity - Liquidity is also improving. Now the company will be able to pay all current liability now without any liquidity issues.

Solvency - There has been a massive increase in Long term debt which is evident from the increase in Debt to assets and Debt to equity ratio.