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AD1101

NANY ANG TECHNOLOGICAL UNIVERSITY

SEMESTER 2 EXAMINATION 2015-2016

AD1101- Financial Accounting

April2016 Time Allowed: 2 Yz hours

INSTRUCTIONS

1 This paper contains THREE (3) questions and comprises SEVEN (7) pages and
ONE (1) appendix of ONE (1) page.

2 Answer ALL THREE (3) questions.

3 The number of marks allocated is shown at the end of each question.

4 Begin your answer to each question (not each part) on a separate page of the answer
book.

5 Please write clearly. Undecipherable writing cannot be marked.

6 Answers will be graded for content and appropriate presentation. Show complete
workings where appropriate.

QUESTION 1 BEGINS ON PAGE 2

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AD1101

Question 1

Part I

Delta Ltd has investments in the shares of the following companies:

Investees
Alpha Ltd Beta Ltd Theta Ltd GamaLtd
No of 400,000 400,000 500,000 400,000
outstanding
shares
No ofinvestee's 160,000 60,000 450,000 50,000
shares owned by
Delta
Date of shares 1 July 2014 30 November 1 January 2014 31 August
acquisition 2015 2015
Market price $3.50 $1.20 $4.50 $0.80
paid per share
on acquisition
Market price per $3.25 $1.40 $5.20 $0.70
share on 31
December 2015
Investee's $130,000 $110,000 $250,000 $200,000
reported net
income for the
year 2015
Delta's share of $16,000 Nil Nil $2,500
dividend
declared by the
investee
companies

Other Investment

During the last quarter of its financial year ended 31 December 2015, Delta purchased a
small retail shop in the main shopping district for $500,000. The company does not intend to
use this shop to sell its own products but instead to hold it to earn rental income and for
capital gain. The fair value of the retail shop at the end of its 2015 financial year is $520,000.
The retail shop has not been rented out until the 1st quarter of2016.

Additional information

(1) Delta Ltd has a seat on the board of directors of Alpha Ltd.
(2) Other than its investments in the above companies, Delta Ltd has no other business
dealings with these companies.

Note: Question No. 1 continues on page 3

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AD1101

Question 1 (continued)

(3) The investment in Beta Ltd is to take advantage of short-term price fluctuations, while
Delta does not intend to sell its investment in Gama Ltd in the short run.
(4) All its investee companies have the same fmancial year end as Delta.
(5) Investment in property is to be carried at fair value.
(6) All the assets and liabilities of the subsidiary are recognised and stated at their
respective fair values in the subsidiary's balance sheet.
(7) The cost of investment in subsidiary is equal to the fair values of the net identifiable
assets of the subsidiary acquired.
(8) Investment in subsidiary is to be accounted for at cost.

Required

(i) Describe how Delta Ltd should account for the above investments in its books for the
financial year ended 31 December 2015, including its share of the dividend declared
by its investee companies, if any. No journal entries are required.
(17 marks)

(ii) Describe the effects of each of the above investments on Delta's statement of profit or
loss and other comprehensive income for the financial year ended 31 December 2015.
(8 marks)

(iii) How will your answers in (ii) above differ from those items recognised in the Group's
2015 statement of profit or loss and other comprehensive income?
(4 marks)

(iv) Prepare journal entries to account for the purchase of the retail shop during the last
quarter of2015 and also its measurement on balance sheet date.
(2 marks)

Part II

Delta's statement of financial position has a "deferred tax liability" of $2,000. Deferred tax
liability at the end of its previous financial year was zero.

Assume corporate tax rate is 10%.

Required

You are required to calculate the temporary difference and prepare a short note explaining the
meaning of "deferred tax liability" to Delta's investors.
(3 marks)

(TOTAL: 34 marks)

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Question 2

(a) Irrelevant Ltd purchased an equipment on 1 July 2003 for $80,000. The equipment
has a residual value of $2,000, and depreciation is calculated using the double
declining balance method over a period of 10 years. On 30 September, 2015,
Irrelevant sold the equipment to a scrapyard for $2,1 00 cash, but had to pay the
scrapyard $200 cash for the cost of removal.

Required

(i) Prepare the necessary journal entries to record the disposal of the equipment.
(4 marks)

(ii) Describe the treatment of the above disposal in Irrelevant's statement of cash
flows under the indirect method.
(2 marks)

(b) Updown Ltd's annual reported net income for the years 2012 to 2015 is shown in the
table below. However, a review of Updown's inventory records reveals inventory
misstatements.

2012 2013 2014 2015

Reported net income 30,000 35,000 42,000 38,000

Ending Inventory understated 1,000 5,000

Ending Inventory overstated 2,000 4,000

Required

(i) Using the information provided in the above table, determine Updown's
correct net income for each of the years 2012 to 2015. Show all necessary
workings.
(8 marks)

(ii) Explain the effects of the inventory misstatements on

(1) Updown's 2015 financial statements, and
(2) Inventory Turnover for 2015.
(4 marks)

Note: Question No.2 continues on page 5

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Question 2 (continued)

(c) NEA Ltd (NEA) develops, produces and markets a wide range of computer software
and communication devices to all its retailers on terms "2110, net 35". The following
information was extracted from its recent financial statements:

2015 2014 2013

Accounts receivable (AIR), $x $5,200 $5,000
net of allowances of $166 (2014: $242 and
2013: $230)
Receivables turnover 7.2 7.45 7.6
Net revenues (all on credit) $40,320 $y $35,000

According to its 2015 Annual Report, NEA recorded an impairment loss of AIR of
$44 in its statement of profit or loss.

Required

(i) Determine the amount of x and y in the above table. (2 marks)

(ii) Determine the amount ofbad debts written off during the year 2015.
(2 marks)
(iii) Determine the cash collected from customers for the year 2015.
(3 marks)
(iv) Evaluate the credit policy ofNEA.
(5 marks)

(TOTAL: 30 marks)

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Question 3

Zion Ltd (Zion), a manufacturer of electronic parts, was listed on the Singapore Exchange
(SGX) on 13 May 2011. For the financial year ended 31 March 2016, Zion announced an
increase in pre-tax income of nearly 8.3% despite a contraction in the manufacturing sector.

Leo works in the accounting department of Zion. On the day of the earnings announcement,
Leo and his friend, Lulu met for supper. During super, Leo heaped praises on the Chief
Executive Officer (CEO) of Zion for his 'hands-on-approach' in running the business:

Leo: "At the beginning of the current accounting year, the CEO revised the useful life of all
manufacturing equipment in the plant from 8 to 12 years. He said this revision was long
overdue as the company had originally underestimated the useful life of the equipment. He
also found that the company's strict credit granting policies favoured the bigger customers
and discriminated against the smaller customers. Hence, in late October 2015, he requested
the sales department to revise the credit granting policies to include smaller customers. No
wonder the sales increased during the year. Doesn't this show his far-sightedness?"

Lulu: "Yes, indeed, it does!"

Leo: "That's not all! The company has not declared any dividends since its listing. Well,
that's because the CEO said that all funds generated from the business are re-invested in the
business. Don't you think that our company has a very bright prospect ahead?"

Lulu: "Yes, indeed. Your company deserves a lot of credit for achieving a 8.3% increase in
earnings despite the intense competition in the market. It is a significant achievement!"

After supper, Lulu headed home hurriedly to examine Zion's latest financial statements and
assess whether she should buy some shares in this company. She retrieved the latest annual
report of Zion from the SGX website and was overwhelmed by the amount of information
disclosed in the annual report.

As Lulu wanted to make a speedy decision, she decided to focus only on the information
presented in the statement of profit or loss and the information she gathered from her friend
over supper.

Note: Question No.3 continues on page 7

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Question 3 (continued)

Zion Ltd
Statement of profit or loss for the year ended

31 March 2016 31 March 2015

($000's) ($000's)
Sales revenue 2,514,000 2,300,000
Less: Sales returns (134,000) (24,000)
Net Revenue 2,380,000 2,276,000
Cost of goods sold (1 ,670,000) (1 ,206,000)
Gross profit 710,000 1,070,000

Gain on disposal of plant, property and equipment 72,000 24,000

Fair value gain/(loss) on investment properties 25,000 (2,000)
Depreciation (36,000) (66,000)
Staff-related expenses (240,000) (270,000)
Marketing expenses (60,000) (195,000)
Research expenses (120,000) (215,000)
Other operating expenses (70,000) (103,000)
Finance charges (40,000) (8,000)
Share of profits/(losses) of associated companies 8,000 (5,000)
Profit before taxation 249,000 230,000

Required

Put yourself in Lulu's shoes. Based on your analysis of the statement of profit or loss and the
information gathered from her friend, what would your decision be? Provide reasons to
support your position. Begin each reason on a separate line.
(36 marks)

-END OF PAPER-

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Appendix I

List of Financial Ratios and Formulae

Financial ratios Formulae

Average collection period 365 I Receivable turnover ratio
Average days' in inventory 365 I Inventory turnover ratio
Current ratio Current assets I Current liabilities
Debt-to-equity Totalliabilities I Total equity
Dividend payout Dividend I Net income
Dividend yield Dividend per share I Market price per share
Gross profit margin Gross profit I Net sales revenue
Inventory turnover Cost of goods sold I Average inventory
Net profit margin Net income I Net sales revenue
Quick ratio (Cash+ Short-term investments+ Net accounts
receivable) I Current liabilities
Receivables turnover Net sales revenue I Average net receivables
Return on assets Net income I Average total assets
Return on equity Net income I Average stockholders' equity
Times interest earned (Net income + Interest expense + Income taxes
expense) I Interest expense

- END OF APPENDIX-

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AD1101 FINANCIAL ACCOUNTING

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1. Please do not turn over the question paper

until you are told to do so. Disciplinary
action may be taken against you if you do so.

2. You are not allowed to leave the examination hall unless

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if you need to communicate with the invigilator.

3. Please write your Matriculation Number on the front of

the answer book.

4. Please indicate clearly in the answer book (at the

appropriate place) if you are continuing the answer to a
question elsewhere in the book.