Course Code N § ACCfllllA-C & AC.

crJllIA-K mI 11 J'ifJ Page I of 11

!f5iIfl3t*_
The Chinese University of Hong Kong Not to be
Course Examination lsi Term 2015-2016 !f..l1ft S ;ftll; taken away
Course Code & Title # E1

Time allowed *M :
Student LD. No. Seat No. __
A Multiple Choices (20 pQjqts)
Answer all MC Questions on the MC Answer Sheet. Choose the best answer.

Multiple Choice Questions

Not to be provided
P.l-PA
 5 J{(* 11 g) Page 5 of 11
Ii Problems (80
No explanation is required for all journal entries. Show all supporting calculations.

Problem 1 (12 points)

Belmont Company adopts the accrual basis of accounting and uses the indirect method to prepare its statement
of cash flows. The company has the following comparative balance sheet data available:
- 00 0
12/3112014 12/3112013
Cash $30,000 $80,000
Accounts Receivable, net 160,000 100,000 6 0 0 0 0
-

Inventory 100,000 70,000 -30,000

Prepaid Rent 20,000 10.000 -10,000
Total Current Assets $310,000 $260,000
Equipment $400,000 $200,000
Accumulated Depreciation (60,000) (50,000)
Total Assets $650,000 S410.000

Accounts Payable $50,000 $40,000 +10,000

Salaries Payable 40,000 40,000
Notes Payable
°
Ordinary Shares, $1 par 300,000° 50,000
100,000
Additional Paid-in Capital
Retained Earnings
50,000
210,000 °
180,000
Total Liabilities & Shareholders' Equity $650.000

Additional information:
t7.NO t t

1. Belmont Company reports net income of $1 00,000 and Depreciation Expense of $20,000 for the year
ending December 31, 2014.

2. Dividends declared and paid in 2014, $70,000.

-70,000 。
⼗䘣
3. Equipment with a cost of $20,000, with Accumulated Depreciation of $10,000 was sold for $3,000 o
during 2014.
-220,010 loss 砒
4. New equipment was purchased for cash in 2014.
上
Required:

Calculate the net cash provided or used by operating activities, the net cash provided or used by investing
activities, and the net cash provided or used by financing activities for the year ending December 31, 2014.
 Course Code r . & A CT2111A-K

Problem 2 (18 points)

Partl (6 points)
The following transactions of Ace Company occurred during 2014 and 2015. December 31 is the fiscal year
end.

Apr. 1 Purchased a machine at a cost of $1 ,000,000, paid cash $200,000 and issued
a one-year, 10% note payable for the remaining amount. Ace Company
agrees to pay interests every six months.
Sep.30 Paid interests for the first half year.
Dec.31 Accrued interest on the outstanding note payable.

2015
Mar. 31 Paid the note payable and the rest of interests at maturity.

Requirement:
Record all the above transactions in the company's journal.

Part 2 (12 points)

Suppose Ace Company is considering two plans for raising $800,000 to purchase a machine on April 1sf, 2015.
Plan A is to issue a one-year, 10% note payable. Plan B is to issue 200,000 shares of share capital at $4.00 per
share.

If the business condition is good, Ace Company will earn net income before interest and taxes of$I,OOO,OOO
by the end of2015. lfthe business condition is bad, Ace Company will earn net income before interest and
taxes of $60,000 by the end of 2015.

On Jan 1st, 2015, Ace Company has 200,000 shares of share capital outstanding. The income tax rate is 25%.

Requirements:

1. Analyze Ace Company's situation to determine which plan will result in higher earnings per share in
both good and bad business conditions. (Show your calculations and make comparisons) (8 points)

2. Assume that you are the owner ofAce Company. Which plan allows you to retain control of the
company? Which plan creates more financial risk for the company? Which plan do you prefer? Why?
(Explain for both good and bad business conditions) (4 points)
Problem 3 (12 points)
.
Bigbang Company purchased a new stamping machine on January 1,2012, at a cost of$60,000. The machine
has a useful life of 3 years and a residual value of $6,000.

Required:
1) Prepare the journal entry to account for the purchase of the machine. (2 points)

2) Calculate the depreciation expense, accumulated depreciation balance at the end of each year, and net
book value at the end of each year in year 2012 and 2013 using the straight line depreciation method.
(2 points)

3) Calculate the depreciation expense, accumulated depreciation balance at the end of each year, and net
book value at the end of each year in year 2012,2013, and 2014 using the double declining balance
method. (4 points)

4) Suppose the machine is sold for $ 20,000 cash on April 30, 2014. Prepare the journal entry to record
this sale. (Assume straight-line method is used). (4 points)
 ____ 11 frt) Pa e 8 of 11

Problem 4 (15 points)

I) Journalized the following transactions ofACCT Company during the month of October 2015 (9
marks):

01 Issued 50,000 shares of $5 ordinary share each.

03 Engaged an attorney to represent the company on a legal matter. The attorney bills the cor-
poration $18,000 for services (Legal Expenses), and agrees to accept 1,500 shares, rather than
cash (based on fair market value at that time) in settlement of the fee.

05 Based on the fair market value at that time, issued 11,500 shares for equipment worth $7,250
and a building worth $125,000.

II Bought back 2,000 of its own shares at price $11 per share.

13 Sold 1,500 shares of treasury shares at $15 per share.

20 Retire the rest of the treasury shares by canceling the shares at cost.

22 Declared cash dividend of $50,000.

31 Pay the cash dividends declared on 22 October.

II) (6 points)

Alexander Wong recently set up ZTV Company Ltd. The company issued ordinary shares to a scientist who
provided technical management services worth $100,000 to the corporation. ZTV also issued ordinary shares
to an investor in exchange for his broadcasting building with a market value of $150,000. In addition, ZTV
received cash both for the issuance of 4,000 shares of its preference shares at $100 per share and for the is-
suance of 30,000 of its ordinary shares at $1.5 per share. During the first year of operations, ZTV earned a net
income of $200,000 and declared a cash dividend of $60,000. Without making journal entries, determine the
total paid-in capital (with schedule) created by the relevant transactions.
 Course Code ;f3j. § A(;,5:.D 11.lA-C & ACQAIIIA-K 9 II Jr) Page 9 of 11

Problem 5 (23 points)

You are the senior accountant of International Mining Limited (IML). Because of changes in the business
environment, your Chief Financial Officer (CFO) has asked you to analyze the financial situation of the
company. You start by calculating various financial ratios of IML over the past two years to develop a better
understanding of recent changes in the company's financial performance.

Required:
Please complete parts (a), (b), and (c) in Table 1 (attached on page 11). This page is to be separated and placed
inside your answer booklet.

a. Complete the financial ratios in Table 1 for IML for years ending 2014 and 2013 (columns B and C).
Round your answers to two decimal places. (5 points)

b. In Column D, indicate whether the trend from 2013 to 2014 represents an improvement (Improve) or
deterioration (Decline) for IML. (2.5 points)

c. In Column E, indicate the primary use of each ratio, that is, whether each ratio is related to i) cash
conversion, ii) short-term liquidity, iii) long-term liquidity, or iv) profitability. (2.5 points)

Answer parts (d) to (f) in your answer booklet.

d. Your CFO is most concerned about two sets of ratios, those related to profitability and those related to
long-term liquidity. Please indicate whether IML is improving or deteriorating along these two di-
mensions. Provide at least four (4) explanations for these changes. For example, if working capital
improved, do not just say it went up, so it improved, but explain why/how it improved. (4 points)

e. The marketing manager believes that the best way to improve IML's financial performance is to offer
more discounts and promotions to attract more customers. What are some costs and benefits to offering
more discounts and promotions to attract customers? Based on the information contained in the fi-
nancial statements and calculated from your financial ratios, do you believe this is a good idea? Why or
why not? (4 points)

f. Your CEO sees the large increase in cash and wants to payout a dividend of $50,000. Explain at least
four (4) factors to consider when deciding whether to pay a dividend. Do you think the company
should pay the dividend? Why or why not? (5 points)
Course Code N § ACCT111lA-C & ACCTIlllA-K
..
25 10 I I'D Page 10 of 11
International Mining Limited (lML)
Comparative Income Statement
Years Ending December 31,2014,2013, and 2012
._-
2014 2013 2012
I Sales* 380,772 340,060 321,000
Returns and Allowances· (2,950 2,800) {3,OOO)
Discounts'" (800) (1,5071 (2,209)
Net Sales 377,022 335,753 315,791
Cost of Goods Sold (152,309) i136,024) 1128,400)
Gross Profit 224,713 199,729 187,391
Bad Debt Expense (21,323 (15,408)
Other Operating Expenses (48,95Ql (50,306) i

Income from Operations 153,012 133,096 121,677 i

Interest Expense (15,000) (13,000) (12,000)
Income before Income Taxes 138,012 120,096 109,677
Income Tax 22,772 19,816 18,097
Net Income 115,240 100-,280 91,580

'" Initially, 20% of sales are cash sales, 80% are credit sales. Returns, Allowances, and Discounts are all
from credit sales.

International Mining Limited (IML)

Comparative Balance Sheet
As of December 31,2014,2013, and 2012
Assets 2014 2013 2012
Current Assets:
Cash 194,869 75,493 80,600
Accounts Receivables (gross) 42,440 39,227 36,480
Allowance for Doubtful Accounts (7,42lD. 17,36TI (7,296)
Inventories 42,500 42,003 42,835 .
Total Current Assets 272,381 149,358 152,619 I
Non-Current Assets: !

Longwterm Investments 324,000 321,948 226,077 :

Property, Plant, and Equipment 560,710 546,441 528,213
'----
..

Accumulated Depreciation (282,664) (280,603) (266,043)

i Total Non-Current Assets: 602,046 587,786 488,247
Total Assets 874,427 737,144 640,866
Liabilities
Current Liabilities
Accounts Payable 59,366 62,553 61,895
Unearned Revenue 40,000 39,500 39,430 .
Notes Payable 50,000 50,000 50,000
Total Current Liabilities 149,366 152,053 151,325
Long-term Debt 220,000 210,000 200,000
i Total Liabilities 369,366 362,053 351,325
. Shareholders' Equity
Share Capital 200,000 200,000 200,000
Retained Earnings 305,061 189,821 89,541
Total Shareholders' Equity 505,061 389,821 289,541
 Course Code P § A(:Q'JlllA-C & . II 1 Page] 1 of 11
Student I.D. No. .-

Seat No. :
(Problem 5 continued)
Please write your answers directly in Table 1 and detach this page from the question book for submission
together with your answer booklet.

Table 1 for Parts (a), (b), and (c)

(Please show your calculations and limit your answers to 2 decimal places if necessary)

A B C D E
Ratios 2014 2013 Improve or Purpose
Decline
Accounts Payable Out-
standing Period
365 * Avg Accounts Payable
:=
Cost oj Goods Sold
Accounts Receivable Col-
lection Period
365 * Avg Net Accts Rec
=
Net Credit Sales

Acid-test Ratio
Cash + ST Invests + Acc Rec
= Current Liabilities

Current Ratio
Current Assets
Current Liabilities
-]
Debt Ratio
Total Liabilities
=
Total Assets

Inventory Resident Period

365 * Avg Inventory
= Cost of Goods Sold
Return on Assets
Net Income
=
Avg Total Assets

Return on Equity
Net Income
=
Avg Shareholders' Equity

Times-Interest-Earned
Income from Operations
=
Net Interest Expense

. Working Capital
= Current Assets
- Current Liabilities

***END ***