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KCL 2014 Part A Solution

The document provides a detailed analysis of depreciation methods including straight line, diminishing balance, and sum of the units, highlighting their differences in charge patterns and carrying values. It also includes a liquidity analysis with calculations for current, quick, and cash ratios, as well as profitability metrics like ROE and ROA. Additionally, it discusses revenue recognition principles related to sales transactions and the impact on financial statements.

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21 views3 pages

KCL 2014 Part A Solution

The document provides a detailed analysis of depreciation methods including straight line, diminishing balance, and sum of the units, highlighting their differences in charge patterns and carrying values. It also includes a liquidity analysis with calculations for current, quick, and cash ratios, as well as profitability metrics like ROE and ROA. Additionally, it discusses revenue recognition principles related to sales transactions and the impact on financial statements.

Uploaded by

Stephanie Im
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Solution 4SSMN135 to MAIN exam question

QUESTION 1
Depreciation charge
1. Straight line method
Depreciation = Cost – Residual Value = EUR 41,000 – EUR 4,000÷ 5 years = EUR 7,400
each year
2.
Diminishing balance
Rate using formula = 37% (approx.)
Cost of the cement mixer 41,000
2014 depreciation charge 15170
Carrying value or net book value (NBV) or written down value (WDV) 25830
2015 depreciation charge 9557
Carrying value 16273
2016 depreciation charge 6021
Carrying value 10252
2017 depreciation charge 3793
Carrying value 6459
2018 depreciation charge 2389
Residual value 4069 (varies with decimal spaces)

Sum of the units method


Per hour charge = 4.3529 ( 2 decimals ok)
Depreciation charge for 2000 = EUR 4.35 * 2,500 hours = EUR 10882.352.
Depreciation charge for 2001 = EUR 4.35 * 2,625 hours = EUR 11418.75.
Depreciation charge for 2002 = EUR 4.35 * 2,250 hours = EUR 9787
Depreciation charge for 2003 = EUR 4.35 * 750 hours = EUR 3262
Depreciation charge for 2004 = EUR 4.35 * 375 hours = EUR 1631.25

The pattern of depreciation for the straight line method differs significantly from that for the
diminishing balance method. In the first two years, the depreciation charge using the
diminishing balance method is significantly higher than that using the straight-line method.
Thus, the carrying value under the straight-line method is higher than that under the
diminishing balance method. Depreciation under the sum of the units method differs from
that under the other methods in that it follows no regular pattern. It varies with the amount of
use. Consequently, depreciation charge is higher in which are the years of greatest use. Use
declined significantly in the last two years.

QUESTION 2
Assets Liabilities + Equity

Inventor Trade accrued


Cash y Trade and Prepaid paybles expenses Profit
other expenses
receivables

-
1 29,000 3,000 -26,000
-
2 34,000 2,000 -36,000
3 17,500
4 32,500 113,000
5 63,000
6 90,000 80,000 170,000
7 -85,000 -85,000
8 -2,000 -2,000

27,000 26,000 80,000 3,000 113,000 2,000 21,000

136,000 136,000

(b) Match expenses to the relevant revenues example: prepaid and accrued expense,
deprecation – discuss .

QUESTION 3
Liquidity= Liquidity analysis relates to evaluating current liabilities
calculate any ONE of the following. Each of these ratios attempts to measure the ability of a
firm to pay its current obligations.

Current ratio = Current assets = 65,000 = 2.5


Current liabilities 26,000
This ratio matches the amount of cash and other current assets that will become cash within
one year against the obligations that come due in the next year. This ratio shows that
currently the company can pay its current liabilities more than 2 times over.

Quick ratio = Current Assets- Inventory = 65,000-23,000 = 1.62


Current liabilities 26000
Cash ratio = Cash and cash equivalents = 21,000 = 0.81
Current liabilities 26,000

Profitability
Gross profit margin= Gross profit/ sales *100
EBITDA margin = EBITDA/ sales *100
Net Profit margin= Net profit/ sales *100
ROE : Answers how well are managers employing the funds invested by shareholders?
ROA

In these question sales is missing so you can only calculate ROE or ROA.
ROE = Net profit/ Equity= 40,000/81,000*100= 49.38%
ROA = Net profit/ Assets= 40,000/183,000*100= 21.86%

Solvency analysis relates to longer term liabilities. You can calculate any one of the earnings
coverage ratios (data not available here) or leverage ratios.
For example
Debt = 45,000 = .44
Equity 102,000

QUESTION 4

Cash Trade and Profit


other
receivables

3rd
may 209,000 220,000
-11,000
3 202,730 -209,000 -6,270
4 -20273 -20273

Revenue is recognized in May when stoves are delivered- discuss revenue recognition
principle: revenue is not earned until the merchandise is delivered.
April 0 June 0 May ALL
Revenue section of Income statement
Gross Sales 220,000
Less 5% trade/volume discount 11000
Less sales returns 20273
Net Sales 188727
Cash discount NOT included in revenue calculation.

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