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# Revision Questions 1.     Non-Current Assets Provide the journal entries for the following transaction: Matthew built a...

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 1st January. Allotments are made on 14th January with all allotment money received by 30th January. The call was made on 1st May and payment was due by 14th May. On 14th 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 30th May. On June 1st any remaining cash in the forfeited share reserve is refunded.

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

Cheung engaged in a share buyback on 1st 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

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.

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