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= 15,000
6. Recognition of a wage expense of 6,000 and a liability for wages payable 6,000.
The income statement is as follows:
Income statement for period ended December 31, 2015 (in )
Sales
Cost of goods sold
Gross profit
Expenses:
Wages (44,100 + 6,000)
Selling expenses
Other operational expenses
Interest expenses
Bad debts expense
Depreciations
792,000
472,500
319,500
50,100
123,000
42,100
6,000
3,000
20,000
244,200
75,300
30,120
45,180
27,500
475,000
502,500
30,000
472,500
240,000
74,500
210,000
418,500
210,000
30,000
30,000
Receivables
Accounts receivable
Allowance for doubtful accounts
42,000
3,000
39,000
5,000
5,000
205,380
165,500
Current assets
Inventories
Merchandise
100,000
105,380
35,000
6,000
6,000
Tax payable
30,120
77,120
287,120
492,500
74,000
492,500
19,800
105,380
B. Questions Answers:
1. Financial statements should provide a true and fair view of the financial position and the financial
performance of a firm. As a consequence a firm should provide a fair presentation of the uncollectible
amount of its receivables. Besides the prudence principle requires the recognition of all probable losses
and expenditures as they are incurred. Consequently, this demand will be valued at the probable
realization value, namely the amount that the firm is likely to receive from B while the firm should
recognize a loss for the amount that is likely not to be collected.
2. Financial statements should provide a true and fair view of the financial position and the financial
performance of a firm. As a consequence a firm should provide a fair presentation of its liabilities.
Subject 2 (25%)
A.
i)
FIFO Periodic
Units
60
70
65
30
225
Unit Cost
15.00
17.50
19.50
21.50
Total
900
1,225
1,267.5
645
4,037.50
Ending Inventory
Sales from Sept 19 Purchase
Sales from Sept 24 Purchase
Sales from Sept 29 Purchase
Units
10
80
40
130
Unit Cost
21.50
17.50
22.00
Total
215
1,400
880
2,495
DATE
Sept
01
04
Units
70
Purchases
Unit
Total
Cost
17.5
Units
1,225
08
60
35
12
65
19.50
1,267.50
19
40
21.50
860
22
24
35
65
5
80
17.50
25
40
22.00
15.00
17.50
17.50
19.50
21.50
900
612.50
612.50
1,267.50
107.5
1,400
27
29
Sales
Unit
Total
Cost
21.50
537.5
880
Units
60
60
70
35
Balance
Unit
Total
Cost
15.00
900
15.00
900
17.50
1,225
17.50
612.50
35
65
35
65
40
35
17.50
19.50
17.50
19.50
21.50
21.50
612.50
1,267,50
612,50
1,267,50
860
752.5
35
80
10
80
10
80
40
21.50
17.50
21.5
17.50
21.5
17.50
22.00
752.5
1,400
215
1,400
215
1,400
880
Units
40
80
40
65
225
Unit Cost
22.00
17.50
21.50
19.50
Total
880
1,400
860
1,267.50
4,407.50
Ending Inventory
Sales from Sept 04 Purchase
Sales from Sept 01 Inventory
Units
70
60
130
Unit Cost
17.50
15.00
Total
1,225
900
2,125
DATE
Sept
01
04
Units
70
Purchases
Unit
Total
Cost
17.5
70
25
12
65
19.50
1,267.50
19
40
21.50
860
22
40
65
80
17.50
25
40
22.00
Total
17.50
15.00
21.5
19.5
1,225
375
860
1,267.5
1,400
27
29
Sales
Unit
Cost
1,225
08
24
Units
880
17.50
437.50
Units
60
60
70
35
Balance
Unit
Total
Cost
15.00
900
15.00
900
17.50
1,225
15.00
525
35
65
35
65
40
35
15.00
19.50
15.00
19.50
21.50
15.00
525
1,267.50
525
1,267.50
860
525
35
80
35
55
35
55
40
15.00
17.50
15.00
17.50
15.00
17.50
22.00
525
1,400
525
962.5
525
962.5
880
B. When inventory costs are expected to increase LIFO gives higher cash balance because it results in
lower income tax liability. Moreover, LIFO matches current costs with current revenue. Besides, it may
better reflect the usual pricing policy of a firm, which is to raise selling prices when replacement cost
increases despite the fact that goods are still on hand at the old lower price. The main arguments cited
against LIFO are:
1. There is no advantage to use LIFO when costs are rising.
2. The LIFO inventory on the balance sheet will be reported at old, out-of-date unit costs.
3. The LIFO does not precisely match replacement costs with revenues.
4. LIFO is subject to manipulation. A firm can affect its profits by changing its usual purchasing
patterns. In periods when prices rise rapidly, an entity can decrease its reported profit by
making large purchases at year-end or instead increase its reported profit by delaying
purchases.
5. The resultant cash flows do not correspond to the physical flow of the inventory.
6. It is complex and costly to apply.
When firms management is more concerned about reported profits, they are more likely to prefer
FIFO when inventory prices increase. Besides a firm may choose FIFO over LIFO for the following
reasons:
1. Firms can reduce their tax liabilities using FIFO when facing declining costs.
2. When inventory prices are rising the use of FIFO instead of LIFO increases inventory values.
Such an increase results in a more favorable presentation of firms financial condition and
performance.
3. Managements compensation plans may calculate bonuses using reported profits. Because
FIFO (vs. LIFO) increases reported income provided that the prices rise FIFO may
increase managers compensation and as a consequence motivate managers to choose FIFO.
4. A firm may choose FIFO in order to report higher profits in the belief that it will lead to
higher prices for firms stock.
Subject 3 (25%)
A.
-License. The license has an indefinite life. If no factors (legal, regulatory, contractual,
competitive, or other) limit the useful life of an intangible asset, a firm considers its life indefinite.
An indefinite life means that there is no foreseeable limit on the period of time over which the
intangible asset is expected to provide cash flows. A company does not amortize an intangible
asset with an indefinite life. ABC considers that there is no limit on the period of time over which
the license will generate economic benefits, while it can renew the license indefinitely.
Thus the license has an infinite life and it is not amortized. Its book value on December 31, 2016
is 120,000.
-Product-patent. On January 2, 2016 ABC determined that the product-patent has a shorter useful
life than originally used in establishing an amortization schedule. This is a change in estimate and
is accounted for prospectively. The remaining unamortized balance is written off over the new
estimate of useful life:
Net balance at January 2, 2016: (120,000-72,000*)
Remaining life of patent (divide by)
Amortization for 2016
48,000
2
24,000
115,000
85,000
25,000
82,000
124,000
65,000
496,000
Less:
Long-term liabilities 177,000
Accounts payable
103,000
(280,000)
License
Product-patent (net value)
Process-patent (net value)
Trademarks (net value)
(70.000 + 25.000)
Non-competition agreement (net value)
Goodwill
120,000
24,000
4,750
95,000
22,222
84,000
349,972
B.
Suggested answer
Goodwill is the difference between the actual purchase price of an acquired firm and the estimated fair
market value of the identifiable net assets acquired. Acquiring firms are willing this premium
because they believe that the value to them owning the acquired firm exceeds the fair market value of
acquired firms individual net assets. Goodwill represents the expected value of future above-normal
financial performance. This expectation arises because favorable characteristics make it likely that the
firm will produce higher average earnings (e.g. superior management team, good labor relationships,
outstanding credit rating etc.).
Goodwill is recorded only when is purchased in the acquisition of another entity. An acquisition by
purchase is the only objective means of measuring the cost of goodwill. Internally generated goodwill
should not be capitalized since no objective transaction with outside parties takes place, and a great
deal of subjectivity may infiltrate in the relevant calculations. Both IASB and FASB provide that
goodwill should not be amortized but companies should adjust its carrying value only when goodwill is
impaired.
Subject 4 (25%)
A. 1.
1
Wages expenses
300
Wages payable
300
2
Accounts Receivable
3,000
Revenues
3,000
3
Depreciation
400
Accumulated depreciation
400
4
Insurance expenses
160
Prepaid insurance
160
5
Bank Deposits
20
Interest revenues
20
6
Interest expenses
180
Notes payable/interest payable
180
7
Unearned revenue
230
Revenues
230
2.
The equity of as at 31 December, 2016, before the adjustment is:
Bank deposits
8,000
Prepaid insurance
800
Office equipment
5,000
Wages expenses
3,000
Accounts receivable
1,200
18,000
2,500
Unearned revenues
6,000
Notes payable
3,000
Services Revenues
4,000
Equity
(15,500)
2,500
Expenses:
Sales
7,230
Interest revenues
20
wages
3,300
Depreciation
400
7,250
Insurance
Expenses
160
Interest
Expenses
180
(4,040)
Profit
Income tax: 3,210 X 20 %
Net profit
3,210
(642)
2,568
(Subject 1)
Students should be able to prepare financial statements. In addition, they should exhibit a through
understanding of fundamental financial accounting principles, such as true and fair view and
conservatism principle.
(Subject 2)
Students should exhibit a thorough understanding of accounting for inventories. In particular, they
should be able to calculate cost of goods sold and closing inventory under various inventory cost-flow
methods. In addition, they should explain the advantages and the limitations of various inventory costflow methods
(Subject 3)
10
(Subject 4)
Students should exhibit an understanding of the recording process. In addition, they should exhibit a
thorough understanding of the fundamental financial accounting principle of going concern.
11