IAsgns6.docx

IAsgns6.docx

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IAsgns6

LESSON6

Suggestedsolutions

Question1（30marks）

Multiplechoice（1markeach）

a.3）

Although1and2areimportantpartsofaninternalcontrolsystemforcash,thesegregationofthedutiesofcashhandlingfromcashaccountingisthemostimportantinternalcontrolovercash.

b.3）

Thecashheldinthesinkingfundisnotavailableforcurrentuse.Therefore,itwouldberecordedasanon-currentassetonthebalancesheet.NotethatwhilepettycashnormallyhasitsownG/Laccount,itwouldusuallybepartofcashreportedonthebalancesheet.

c.4）

Thedirectwrite-offmethodofaccountingforbaddebtsexpenseviolatesthematchingprinciplebecausetheexpenseisrecordedintheperiodwhentheaccountiswrittenoff,whichmaynotbeintheperiodtherelatedsalewasmade.

d.2）

Bothassignmentofaccountsreceivableandfactoringofaccountsreceivablemeanthataccountsreceivableareconvertedtocashpriortotheirnormalcollectiontime.

e.1）

Whenaccountsreceivablearesoldtoafactorwithoutrecourseitmeansthatthefactorisresponsibleforanyuncollectibleaccounts.

f.2）

Thecostofthefirstcomputerwillbe€4,000.Sincethenotepayablecarriesthemarketrateofinterest,nodiscountingisrequired.Togetthecostofthesecondcomputer,thecashpaymentsmustbediscountedat8%.Theonlycashpaymentisthepaymentof€4,320attheendofoneyear.Thepresentvaluefactorforasinglesumtobepaidattheendofoneperiod,discountedat8%is0.9259.€4,3200.9259=€4,000.

g.3）

Thefactthatthemakerofthenoteisexperiencingfinancialdifficultydoesnotnecessarilymeanthatpaymentwon’tbemadeasscheduled.Whenthepayeedeterminesitisprobablethattherecoverablevalueofthenoteislessthanitscarryingvalue,impairmenthasoccurred.

h.2）

Thebankaccountandthepettycashfundaretwoseparatecashaccountsandshouldbeaddedtogethertogetthetotalcashtobereportedonthebalancesheet.

i.4）

Thebankbalanceistoolowcomparedtothecashgeneralledgerbalancebecauseofdepositsintransit.Therefore,depositsintransitneedtobeaddedtothebalanceperbank.

j.3）

Thebankreconciliationisdesignedtoreconcileboththeunadjustedcashbalanceperthebooksandtheunadjustedcashbalanceperthebanktothecorrectcashbalancethatshouldbereportedonthebalancesheet.

（2markseach）

k.3）

€40,000+€20,000–€4,000

Or,youmightnoticethatbothreconcilingitemsareadjustmentstothebankbalance.Thatmeansthegeneralledgerbalanceforcashisthecorrectfinalbalance.

l.2）

€164+€34=€198

Thismeansthatcashisshortby€2.Sincethereisonly€34ofcashleft,€166ofcashmustbeaddedtothepettycashbox.

m.2）

€97,850+€10,000–€13,000

n.3）

€1,840+€36,750–€36,200

o.3）

€1,000–€200

p.1）

X+€3,800+€160–€3,000=€2,500

X=€2,500–€3,800–€160+€3,000

q.2）

€800,000–€62,500

r.4）

€40,000–€3,400

s.1）

€30,000+（€30,0004.3553）

4.3553isthepresentvaluefactorforasix-periodannuityatadiscountrateof10%.

t.4）

YoucouldcalculatethecarryingvalueatDecember31,year2（€120,000）andcompareitwiththerecoverableamount.However,sinceannualinterestpaymentsareexpectedtobemadeeachyeartomaturity,andthestatedinterestrateisequaltothemarketrateofinterest,itshouldbeobviousthatthepresentvalueofthefuturepaymentsisstillequalto€120,000.Ifyouarenotsure,calculateit!

Question2（6marks）

Requirement1（3marks）

FactoringwithoutrecoursemeansthatwhenDesperadosellsitsreceivablestothefactor,itisthefactorthatassumestheriskforanyaccountsreceivablethatcannotbecollectedinthefuture.Ifthefactorisunabletocollectcertainaccountsreceivable,ithasnorecoursetoDesperado.FactoringwithrecoursemeansthatwhenDesperadosellsitreceivablestothefactor,itisDesperadowhoretainssome（orall）oftheriskofuncollectibleaccounts.Ifthefactorisunabletocollectaparticularreceivable,ithastherighttocomebacktoDesperadoforpaymentofthatamount.Desperadowilllikelygetmorecashifitsellsitsaccountsreceivablesonawithrecoursebasis.Sincetheriskofnon-paymentremainswithDesperadounderawithrecourseagreement,thefactorwillbewillingtopaymore.

Requirement2（3marks）

Whenreceivablesaresoldwithoutrecourse,thetransactionisnormallyrecordedasasale.TheaccountsreceivableareremovedfromthebooksofDesperadoandanexpenseequaltothedifferencebetweenthepricepaidbythefactorandthebookvalueofthereceivablesisrecognized.

Whenreceivablesaresoldwithrecourse,thefundsreceivedfromthefactorarenormallyrecordedasaloanfromthefactorratherthanassalesproceeds.Thisisbecausetherereallyhasnotbeenatransferofriskfromthesellertothefactor.Asthecustomersmakepaymentsandfundsarecollectedbythefactor,theloanisreduced.

Question3（14marks）

Requirement1（4marks）

Depositsintransit,November30€3,080

PlusDepositsmadebyRutnipinDecember

（€11,820–€90errorcorrection）11,730

DepositsthatcouldhavebeenreceivedbybankinDecember14,810

DepositsactuallyrecordedbybankinDecember10,000

DepositsintransitatDecember31（depositrecorded

bythecompanybutnotyetrecordedbythebank）€4,810

Outstandingcheques,November30€4,000

PluschequeswrittenbyRutnipinDecember6,400

ChequesthatcouldhaveclearedbankinDecember10,400

ChequesactuallyclearedbybankinDecember8,200

OutstandingchequesatDecember31（chequeswritten

bythecompanybutnotyetrecordedbythebank）€2,200

Requirement2（5marks）

RUTNIPINC.

BankReconciliation

December31,20X5

Cashbalanceperbooks,December31,20X5€18,770

Add:

Notereceivablecollectedbybank1,800

Deduct:

NSFcheque€270

Decemberbankcharge30

Decemberinterestonbankloan470

Errorcorrectionondeposit（€320–€230）90（860）

Adjustedcashbalanceperbooks,December31€19,710

Cashbalanceperbankstatement,December31,20X5€17,100

Add:

Depositsintransit（fromRequirement1）4,810

Deduct:

Outstandingcheques（fromRequirement1）（2,200）

Adjustedcashbalanceperbankstatement,December31€19,710

Requirement3（5marks）

Journalentriesfrombankreconciliation:

a.Cash1,800

Notesreceivable1,800

TorecordcollectionofnotereceivablemadebybankonbehalfofRutnip.

b.Accountsreceivable,Smythe270

Cash270

Tore-establishtheaccountreceivablefromSmythesincetheirchequewasnogood.

c.Bankservicechargeexpense30

Cash30

Torecordthemonthlybankcharge.

d.Interestexpense470

Cash470

Torecordmonthlyinterestonbankloan.

e.Accountsreceivable90

Cash90

Tocorrecterroroncashdepositoriginallyrecordedas€320,whichshouldhavebeen€230.

Question4（20marks）

Requirement1（4marks）

Allowancefordoubtfulaccounts2,400

Accountsreceivable2,400

Thereisnoeffectontotalcurrentassetsasaresultoftheaccountsreceivablewriteoffentrybecausebothaccountsreceivableandtherelatedcontraaccountarereducedbythesameamount.

Requirement2（4marks）

Accountsreceivable5,000

Allowancefordoubtfulaccounts5,000

Tore-establishtheaccountreceivablethatwaspreviouslywrittenoff.

Note:

thecollectionofthis€5,000isincludedinthe€210,000ofcustomerpaymentsfortheyear.

Requirement3（4marks）

ThebalanceintheaccountsreceivableaccountatDecember31,20X6,beforetherecordingofthe20X6baddebtexpenseis€194,600asderivedbelow:

Accountsreceivable

Bal.January1

162,000

Cashcollected

210,000

Salesonaccount

240,000

ARwrittenoff

2,400

Re-establishARpreviouslywrittenoff

5,000

Bal.December31

194,600

ThebalanceintheAllowancefordoubtfulaccountsatDecember31,20X6beforetherecordingofthe20X6baddebtexpenseis€6,000asderivedbelow:

Allowancefordoubtfulaccounts

ARwrittenoff

2,400

Bal.January1

3,400

ReestablishARpreviouslywrittenoff

5,000

Bal.Dec.31

6,000

Requirement4（4marks）

a.Tocalculatebaddebtexpensebasedonthecreditsalesmethod,theexpecteduncollectiblerateof2%isappliedtothecreditsalesfortheperiodof€240,000.

2%of€240,000=€4,800

Thejournalentrywouldbe

Baddebtexpense4,800

Allowancefordoubtfulaccounts4,800

b.Tocalculatebaddebtexpensebasedontheaccountsreceivablemethod,therequiredallowanceatDecember31,20X6（€5,400）iscomparedtothebalanceintheAllowancefordoubtfulaccountspriortotheadjustmentforbaddebts（€6,000）andanentryismadetoadjusttotherequiredamount（€5,400–€6,000=（€600））.Thejournalentrywouldbe

Allowancefordoubtfulaccounts600

Baddebtexpense600

Thereasonforthenegativebaddebtexpenseisthattheremusthavebeenanoverestimationoftheexpenseinpriorperiods.

Requirement5（4marks）

CreditsalesmethodAccountsreceivablemethod

Currentassets

Accountsreceivable€194,600€194,600

Less:

Allowancefor

doubtfulaccounts

（1）10,800

（2）5,400

€183,800€189,200

（1）€6,000+€4,800

（2）€6,000–€600

Question5（10marks）

Requirement1（4marks）

Thepresentvalueofthe€750,000non-interestbearingnotewouldbe

€250,0002.48691=€621,725

1Thepresentvaluefactorofanannuityforthreeperiodsat10%（Table2,AppendixALesson5）

Therefore,the€750,000facevaluenotewouldberecordedas

Facevalueofnote€750,000

Less:

Discountonnotereceivable128,275

Presentvalueofnotereceivable€621,725

TheentrytorecordthesaleoftheequipmentbyXTLonJanuary1,20X5wouldbe

Cash