Accounting Foundations

Sample Examination Question and Solutions

Instructions to Candidate:

1. Answer ALL EIGHT (8) questions in Part B.

2. Total marks for this paper is 100 marks.
3. This is an Open Book examination.
4. You should answer all questions in the answer book provided and should begin each
answer on a new page in the answer book.
5. Please allocate your time according to the percentage contribution of the questions.
6. The exam is valued at 55% of total assessment.

IMPORTANT:
This is a sample exam only. The actual exam might include different topics covered in
the course or allocate different weightings to topics and in marking allocations!

PLEASE SEE NEXT PAGE

1004 Accounting Foundations Sample Final Exam Page 2 of 20

QUESTION 1 Inventory

Harry's Hardware uses a perpetual inventory system. During September 20X3, the following
purchases and sales transactions occurred:
i. Goods sold on credit for $4 000 plus GST (cost $3 280) were returned.
ii. Purchased goods on account for $5 000 plus GST;
iii. Paid for the balance of the purchase in time to receive a discount of 2% of the
purchase price; and
iv. Sold goods costing $15 300 for $22 600 plus GST. Cash of $10 000 was received
with the balance on credit.
Required:

Prepare general journal entries to record the above transactions.

Narrations are not required.

Total marks Question 1 = 10 marks

 1004 Accounting Foundations Sample Final Exam Page 3 of 20

Suggested solution:
i. Dr Sales returns and allowances 4 000
Dr GST payable 400
Cr Accounts receivable 4 400

Dr Inventory 3 280
Cr Cost of sales 3 280

ii. Dr Inventory 5 000

Dr GST receivable 500
Cr Accounts payable 5 500

iii. Dr Accounts payable 5 500

Cr GST receivable 10.00
Cr Discount received 100.00
Cr Cash at bank 5 390.00

iv. Dr Cash at bank 10 000

Dr Accounts receivable 14 860
Cr Sales 22 600
Cr GST payable 2 260

Dr Cost of sales 15 300

Cr Inventory 15 300

Total marks – Question 1 = 10 marks

1004 Accounting Foundations Sample Final Exam Page 4 of 20

QUESTION 2 Balance Sheet

The following information has been obtained for Bondy as at 30 June 20X6.

$
Prepaid insurance 12 000
Income tax payable 18 000
Accounts receivable 15 000
Rent received in advance 5 000
Land (at fair value) 300 000
Vehicle (cost) 45 000
Accumulated depreciation – vehicle (1 July 2015) 15 000
Depreciation expense– vehicle 5 000
Cash at bank 7 000
Loan payable (repayable in 2019) 60 000
Accrued expenses 8 000
Owners equity - closing ?

Required:

Prepare a properly classified statement of financial position in narrative format for Bondy Ltd
on 30 June 20X6.
Total marks – Question 2 = 8 Marks
1004 Accounting Foundations Sample Final Exam Page 5 of 20

Suggested Solution
Bondy Ltd
Statement of Financial Position as at 30 June 20X6
Assets $ $
Current Assets
Cash at bank 7 000
Accounts receivable 15 000
Prepaid insurance 12 000 34 000
Non-current Assets
Land 300 000
Vehicle 45 000
Less accum. deprec. - 20 000 (1 mark)325 000
Total assets 359 000

Liabilities
Current Liabilities
Accrued expenses 8 000
Income tax payable 18 000
Rent received in advance 5 000 31 000
Non-current Liabilities
Loan payable 60 000 60 000
Total liabilities 91 000

Net assets 268 000

Owners’ Equity
Capital 268 000

Total marks – Question 2 = 8 Marks

1004 Accounting Foundations Sample Final Exam Page 6 of 20

QUESTION 3 Closing entries

Briefly explain what type of accounts are also referred to as ‘temporary accounts’. Why are
they called ‘temporary accounts’ and what is their role on calculating profit for the period?
Total marks - Question 2 = 4 marks
1004 Accounting Foundations Sample Final Exam Page 7 of 20

Suggested Solution:

Types of accounts that are temporary accounts are revenue and expense accounts (1 mark,
students might also mention drawings accounts here, which is fine). They are called temporary
accounts because they start at zero every year and are closed into the P&L summary account
at the end of each accounting period, i.e., they exist temporarily (2 marks). Their role is vital
for the calculation of profit, as the profit can only be calculated accurately because the
temporary accounts start at zero each period and are closed off at the end of each period (1
mark).

Total marks – Question 3 = 4 Marks

1004 Accounting Foundations Sample Final Exam Page 8 of 20

QUESTION 4 Definition and recognition of financial statement elements

Golden Wattle Accountants Ltd was established on 1 June 20X6. On 1st June the office
manager prepaid insurance worth $1 200 for the coming six months and correctly recognised
this as an asset.

Required:

Using the definitions and recognition criteria from the Conceptual Framework, what Golden
Wattle Ltd should recognise with regard to the prepaid insurance at 30 June 20X6.

Total marks - Question 4 = 12 marks

1004 Accounting Foundations Sample Final Exam Page 9 of 20

Suggested Solution:

On 30 June 20X6, an expense (insurance expense) of $200 should be recognised in the

income statement of Golden Wattle Accountants due to the definition and recognition criteria
of that element of the Conceptual Framework being satisfied.

The definition criteria of an expense are satisfied because there is a decrease in an asset (part
of the prepaid insurance has now been used), resulting in a decrease in equity (a decrease in
asset as the insurance has now been used for one month with no change in liabilities) that is
not a withdrawal of equity by owners.

In addition, the insurance expense satisfies the two recognition criteria of an expense as
follows.
First, the information is assumed to be relevant, as there is not uncertainty that the expense
exists for the company (the insurance cover has been used up by the company) and there is
not low probability, again as the insurance cover has been used up by the company. Second,
the information would result in faithful representation, because the amount of consumption of
future economic benefits can be measured reliably (the $200 per month of insurance cover)
and there are no other indicators that would prevent the insurance expense from being
recognised.

Total Question 4 = 12 marks

1004 Accounting Foundations Sample Final Exam Page 10 of 20

QUESTION 5 Bank reconciliation

Julius Cesar, owner of Cesar’s Salad Bar, wants a bank reconciliation statement to be
prepared for the month ended 30 April 20X6 using the following information:

1. The general ledger Cash at Bank account had a debit balance of $13 206 on 31 March.

2. Balance shown by the bank statement at 31 March was $13 155 Cr.

3. Cheques recorded in the cash payments journal but not presented to the bank for
payment were:

Cheque no. 41 $339

43 $262
46 $423
51 $195

4. A deposit of $1 270.30 appears as a deposit in the cash receipts journal but had not
been recorded by the bank at the date of the statement.

Required
i. Prepare a bank reconciliation statement as at 30 April 20X6.
4 marks
ii. Name two internal control mechanisms that are important to cash management.
Explain each internal control mechanism by using an example.
4 marks
Total marks - Question 5 = 4 + 4 = 8 marks
 1004 Accounting Foundations Sample Final Exam Page 11 of 20

Suggested Solution

i.
Cesar’s Salad Bar
Bank Reconciliation Statement
as at 31 March 20X6

Balance as per bank statement Cr $13 155

Add: Deposit not credited 1 270
14 425
Less: Cheques not presented
Cheque No. 41 $339
Cheque No. 43 262
Cheque No. 46 423
Cheque No. 51 195 1 219
Cash at Bank balance Dr $13 206

4 marks

ii. Any of the following or any other reasonable internal control mechanism:

Name of internal control Explanation

segregation of cashier’s duties from other Cashier should be a separate person from
functions the person that fulfil related duties, e.g. the
person ordering stocks, handling sticks,
etc.
the imprest system of petty cash A small amount of petty cash is kept under
the authority of a specific person to
manage small expenses, such as postage,
etc. For every transaction, a cash receipt
needs to be provided and the amount of
the tax invoices plus the remaining cash
should add up to the cash float.
the daily banking principle Cash should be brought to the bank at the
end of the day to secure it
cash budgets A cash budget should be maintained to
ensure future obligations can be met.
statements of cash flows See above
Electric, mechanic of physical control EFTPOS hardware, cash register, safe,
system etc.

4 marks
1004 Accounting Foundations Sample Final Exam Page 12 of 20

QUESTION 6 Cash budget

a. Shevlin’s Shoes is preparing a cash budget for October and November 20X3. Of the
budgeted monthly sales, 60% are on credit. Of the credit sales, 70% are collected in the
month of the sale, 20% are collected in the month following the sale and 5% are collected
in the second month following the sale. 5% are never collected and are written off. Below
are the budgeted sales for the months of August, September, October and November.

August $ 115 000

September 162 000
October 139 000
November 125 000

Required:

Prepare a schedule of expected cash receipts from sales for October and November
20X3.
4 marks

b. Information about the cash position of Overton Ltd for the month of September 2013 is
presented below.
• The general ledger ‘Cash at Bank’ account had a debit balance of $5 719 on 31
August 2013.
• The cash receipts journal showed total cash receipts of $22 898 for September.
• The cash payments journal showed total cash payments of $24 576 for September.
• The bank statement reported a bank credit balance of $4 033 on 30 September.
• Cash receipts of $1 200 for 30 September were placed in the bank’s night safe on
30 September and were not included in the September bank statement.
• Outstanding cheques at the end of September were: no.259 for $76, no.267 for $135
and no.271 for $204.
• Included in the bank statement were credits for an electronic funds transfer of $675
and interest earned of $128.
• The bank charged account fees of $26 during September.
Required:

i. Calculate the updated totals for the cash payments journal and the cash receipts
journal from relevant bank statement items. Determine the balance of the ‘Cash at
Bank’ general ledger account on 30 September 2013. Show all your calculations.
3 marks
ii. Prepare a bank reconciliation statement as at 30 September 2013.
4 marks

c. "Control over accounts receivable is not quite so important as control over cash". Do
you agree with this statement? Give your reasons.

2 marks
1004 Accounting Foundations Sample Final Exam Page 13 of 20

Suggested solution

a)
October November
Cash sales (40% sales) $ 55 600 $ 50 000
Current month (70% credit sales) 58 380 52 500
From previous month (20% credit 19 440 16 680
sales)
From 2 months earlier(5% credit sales) 3 450 4 860
Total budgeted collections $ 136 870 $ 124 040

4 marks
Suggested solution

i. Cash payments journal = $24 576 + $26 fees = $24 602

Cash receipts journal = $22 898 + $675 EFT + $128 interest = $23 701

Cash at Bank = $5 719 beginning balance + $23 701 cash receipts - $24 602 cash
payments = $4 818

3 marks

ii.
Overton Ltd
Bank Reconciliation Statement
as at 30 September 2013

Balance as per bank statement $ 4 033 Cr

Add Deposits not recorded 1 200
5 233
Less Outstanding cheques
259 $ 76
267 135
271 204 415
Balance as per Cash at Bank account $ 4 818 Dr

4 marks

c) Control over receivables is as important as control over cash. Often in business when
we supply goods to our customers we have to wait up to 30 days before we receive a
cash payment. This may be after we have paid for the goods we have supplied. It is vital
for the survival of a business through adequate cash flow that we collect accounts
receivable within the deemed credit period and that we avoid bad debts at all costs.

2 marks

Total marks Question 6 = 4 + 3 + 4 + 2 = 13 marks

1004 Accounting Foundations Sample Final Exam Page 14 of 20

QUESTION 7 Partnership

Kim and Sammy have decided to form a partnership. Kim invested $180 000 in cash and plant
and equipment with a carrying amount of $80 000 and a fair value of $104 000. Sammy’s
contributed assets and liabilities and details are:

Carrying amount Fair value

Cash at bank $ 120 600 $ 120 600
Accounts receivable 12 000 12 000
Inventory 28 400 32 400
Building 200 000 225 000
Accounts payable 8 500 8 500
Bank loan 180 000 180 000
They decided to divide profits and losses as follows: a $35 000 salary to Kim, 7% interest on
their original investments, and the remainder equally.

Required:

a) Prepare the journal entries to record each partner’s initial investment.

6 marks

b) After a number of years, Kim and Sammy are considering turning their partnership into
a company. Name and explain four advantages a company has over a partnership and
two disadvantages, a company has over a partnership.

6 marks
Total marks - Question 7 = 6 + 6 marks = 12 marks
1004 Accounting Foundations Sample Final Exam Page 15 of 20

Suggested solution
a)
Cash at Bank $180 000
Plant and Equipment 104 000
Kim, Capital 284 000

Cash at Bank 120 600

Accounts Receivable 12 000
Inventory 32 400
Building 225 000
Accounts Payable 8 500
Bank Loan 180 000
Sammy, Capital 201 500

b) Any two advantages or disadvantages of the following:

Advantages Explanation
Limited liability Owners are not personally liable for
debts of the company
Broad source of capital Because of the ease of transferability of
ownership, more potential shareholders
(capital providers) are available
Continuity of existence Transfer of ownership (shares) has no
effect on company existence
Ready transferability of shares Ownership (transfer of shares) is easy
without interruption of business
activities
Use of professional management Obtain best managerial talent even if
ownership changes
Potential income tax savings Personal tax rate (used in partnership)
maybe higher than corporate tax rate.
Especially favourable when using
franking credits

Disadvantages
Increased regulatory burden More training and resources needed to
comply with increased regulatory
requirements
Increased cost This increase in regulatory burden may
lead to increase in cost
Separation of ownership and The separation of management and
management ownership might lead to all problems
associated with principle agency
relationship

6 marks
1004 Accounting Foundations Sample Final Exam Page 16 of 20

QUESTION 8 General journal and adjusting entries and GST

Jan Smart is a financial planner and operates her own business Smart Financial Centre of
which she is the sole proprietor. The following transactions occurred during March 20X6.

March 1 Paid rent of $26 400 (including GST) for the office for the next six months.

March 1 Purchased new office equipment to be used in the business for

$11 000 (including $1 000 GST). The business took out a short-term loan of
$8 000 (to be repaid in October 20X6 with interest charged at 9% per annum
and payable when the loan is repaid) and paid the remainder in cash. The
office equipment is to be depreciated by $2 400 a year.

March 2 Provided financial planning advice to a client and billed the client for
$3 000 plus GST.

March 4 Received $2 200 plus GST in cash for services provided the same day.

March 5 Received $4 650 from a client in settlement of their outstanding debt.

March 6 Paid $1 620 plus GST for telephone charges.

GST is 10%.

Required:
a) Record all of the above transactions in the general journal of Smart Financial Centre.
Narrations are not required.
8 marks
b) Some of the transactions in (a) above will require adjusting entries on
30 June 2016 when the business prepares their financial statements. Record all
adjusting entries required. Narrations are not required. (At the beginning of March
2016, there was $700 of office supplies on hand. At 30 June 2016, $470 of office
supplies remained. No further purchases of office supplies were made in March, April,
May or June other than that above). Show all calculations.
6 marks
Total marks - Question 8 = 8 + 6 marks = 14 marks
1004 Accounting Foundations Sample Final Exam Page 17 of 20

Suggested solutions

a) Dr Prepaid rent 24 000

Dr GST Receivables 2 400
Cr Cash at bank 26 400

Dr Office equipment 10 000

Dr GST Receivables 1 000
Cr Loan payable 8 000
Cr Cash at bank 3 000

Dr Accounts receivable 3 300

Cr Financial planning revenue 3 000
Cr GST Payable 300

Dr Cash in bank 2 420

Cr GST Payable 220
Cr Service revenue 2 200

Dr Cash at bank 4 650

Cr Accounts receivable 4 650

Dr Telephone expense 1 620

Dr GST Receivables 162
Cr Cash at bank 1 782

8 marks
(b)

Dr Rent expense 16 000

Cr Prepaid rent 16 000
($24 000 for 6 months, $16 000 for four months)

Dr Interest expense 240

Cr Interest payable 240
($8 000 @ 9% = $720 per year = $240 for 4 months)

Dr Depreciation expense – equipment 450

Cr Accumulated depreciation – equipment 450
($2 400 per year = $800 for 4 months)

6 marks

Total marks - Question 8 = 8+ 6 = 14 marks

1004 Accounting Foundations Sample Final Exam Page 18 of 20

QUESTION 9 Property, Plant and Equipment

Orange Blossom Ltd acquired a new honey extracting machine for cash on 1 February 20X2.
The cost was $28 000. In addition, Orange Blossom Ltd paid $200 for the delivery of the
machine and $300 for installation. The machine was expected to have a useful life of 10 years
with a residual value estimated at $4 500.

On 2 August 20X4, extensive repairs were carried out on the machine for $6 200 cash. Orange
Blossom Ltd expected these repairs to extend the machine’s useful life by 4 years and it
revised its estimated residual value to $5 654. The machine was eventually sold on 1 April
20X6 for $20 000 cash.

Orange Blossom Ltd uses the straight-line depreciation method, recording depreciation to the
nearest whole month. The end of the reporting period is 30 June. Ignore GST.

Required:

a. Prepare journal entries to record the purchase of the machine.

2 mark
b. Prepare journal entries to record depreciation of the machine on the 30 June for each
of 20X2, 20X3 and 20X4. Assume straight line depreciation.
5 marks
c. Prepare relevant journal entries for 2 August 20X4.
4 marks
d. Prepare journal entries to record depreciation of the machine on 30 June 20X5.
2 marks
e. Prepare journal entries to record the sale of the machine on 1 April 20X6. Calculate
the profit or loss Orange Blossom Ltd made with the sale of the machine.
6 marks
Show all your calculations. Narrations are not required.

Total marks - Question 9 = 2 + 5 + 4 + 2 + 6 = 19 marks

1004 Accounting Foundations Sample Final Exam Page 19 of 20

Suggested Solution
Orange Blossom Ltd
General Journal
a. 2012
Feb 1 Honey Extraction Machinery 28 500
Cash at Bank 28 500
Purchase of machine
(28,000 + 200+ 300)

b. June 30 Depreciation Expense – Machinery 1 000

Accum. Depreciation – Machinery 1 000
Depreciation of machine

(28 500 – 4 500)/10  5/12 = $1 000

2013,
2014
June 30 Depreciation Expense – Machinery 2 400
Accum. Depreciation – Machinery 2 400
Depreciation of machine

(28 500 – 4 500)/10 = 2 400

c. 2014
Aug 2 Depreciation Expense 200
Accumulated Depreciation 200

Acc Depr. Expense – Machinery 6 000

Machinery 6 000

Machinery 6 200
Cash at Bank 6 200
Overhaul of machine.

d. 2015
30 June Depreciation Expense – Machinery 1 837
Accum. Depreciation – Machinery 1 837
Depreciation of machine.

New carrying amount of extracting

machine
= (28 500 – 6 000) + 6 200 = $28,700
Remaining useful life is now 11 years and
6 months
Depreciation for 11 months
($28,700 – 5 654) ÷ 11 1/2 * 11/12 = $1
837
e. 2016
April 1 Depreciation Expense – Machinery 1 503
Accum. Depreciation – Machinery 1 503
Depreciation of machine before sale.
($28,750 – 5 654) ÷ 11½  9/12=$1 503
1004 Accounting Foundations Sample Final Exam Page 20 of 20

April 1 Cash at Bank 20 000

Proceeds on Sale of Machine 20 000
Sale of machine.

Carrying Amount of Machine Sold 25 360

Accumulated Depreciation – Machinery 3 340
Machinery 28 700
Write-off machine.
22 500 + 6 200 – 1 837 – 1 503 = 25 360

The company made a loss on the sale of

Sales price $20 000 less
carrying amount $25 360
= - $5 360

Total marks Question 9 = 19 marks

TOTAL = 100 MARKS

END OF EXAMINATION