Assignments must be submitted through the Turnitin link on the subject portal
Groups up to 3 students maximum are permitted.
Assignment must be in word format only.
All calculations and workings must be shown to receive
any marks for each question
Do not include the question in your answers!
Question 1
Mark Davies has started a lawn mowing business (MD Lawnmowing) as a temporary job/business which he intends to run until he starts his business degree at the University of South Australia in four months. Mark has never owned or run a business before. To start the business on 1 February 2016, he deposited $2,800 into a new bank account opened in the name of the business. The $2,800 consisted of a $2400 loan from his father (repayable at $100 per month) and $400 of his own money. Mark rented some equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns.
At the end of each month Mark sent invoices to his customers. On 30th June, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers.
At 30 June, Mark’s business account cheque book shows a balance of $2,695, and his customers still owe him $650. During the period, he collected $5,300 from customers. His cheque book lists payments for supplies totalling $595, and he still has fuel and supplies that cost a total of $85 on hand. He paid his employees $2,350, and he still owes them $450 for their final week of work.
Mark rented some equipment from Kennard’s Hire. On 1 February, he signed a six-month rental agreement on lawnmowers and paid $840 for the full period. Kennard’s Hire will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Mark has kept the equipment in excellent condition. In fact during May paid $210 to repair one of the mowers.
To transport employees and equipment to jobs, Mark used a trailer that he bought for $720. He believes that the period’s work used up one-sixth of the trailer’s service potential. The business cheque book lists a payment of $690 for private cash withdrawals by Mark during the period.
Mark estimates that he spent approximately 70 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from.
Required
1. Prepare the business Income Statement for the period.
(9 marks)
2. Prepare the classified Balance Sheet at the end of the period.
(11 marks)
3. Was Mark’s venture successful? Give the reasons for your answer. 150 – 250 words only.
(5 marks)
Total for Question 1: 25 marks
Question 2
Jeff Jenkins is confused about the depreciation expense in the accounts for his shop, Chevron Carpets, and would like you to explain the following to him:
i) Why is depreciation charged against the income statement for the display shelving even though Jeff believes the shelving is worth more now than when he bought it just over two years ago?
[3 marks]
ii) Jeff is considering closing the shop in two years time and retiring. If Jeff decides to go ahead with this decision can he still charge the same amount of depreciation expense for the shop shelving as has been done so in the past? Use the Going Concern Assumption in answering Jeff’s question.
[4 marks]
iii) If Chevron Carpets makes a loss in any year Jeff wants to know if he still has to include depreciation expense in the income statement?
[3 marks]
Total for Question 2: 10 marks
Question 3
Mark Thompson submits to you draft accounts for the year ended 30 June 2016, and a Balance Sheet as at that date. Towards the end of the financial year his accountant resigned and he had completed the records himself. He thinks that errors may have occurred and asks for your help. An examination of the accounting records reveals the following:
A. Prepaid Rent for the premises includes $1320 for six months until the end of August.
B. A payment of $2,750 for new office furniture has been incorrectly debited to the Building repairs expense account. The furniture had been purchased on 30 June 2016.
C. Commission due to sales representatives for the quarter ending 30 June 2016, of $2,400, has been not been paid or recorded.
D. Repairs to Mark's private motor vehicle, $750, have been debited to the vehicle account.
E. The unearned revenue account includes an amount of $650 for services provided during June.
F. A fire insurance policy covering buildings was taken out on 01 February 2016, the annual premium of $840 was paid in advance on this date and debited to the Insurance expense account.
G. Interest of $740 on the loan payable held by the business was due, but has not been recorded or paid.
H. No depreciation has been recognised for the year ending 30 June 2016. The draft Balance Sheet shows the following:
Buildings (at cost) $110,000
Less Accumulated Depreciation 22,000 $88,000
Office Furniture & Equipment (at cost) 24,000
Less Accumulated Depreciation 8,000 16,000
These amounts do not include any of the transactions listed above.
Annual depreciation is to be calculated as follows:
Buildings: 3% of cost
Office furniture and equipment: 20% of cost
Required
1. Ignoring GST, show the journal entries required to make the necessary adjustments/corrections listed. Make sure that your journal entries are complete and properly formatted.
(18 marks)
2. Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $19,600 as shown in the draft accounts.
(4 marks)
Total for Question 3: 22 marks
Question 4
You are provided the following financial information for Frontera Ltd:
FRONTERA LTD COMPARATIVE BALANCE SHEETS AS AT JUNE 30
2016 2015
Current Assets
Cash on Hand $2500 $5000
Cash at Bank - 1200
Accounts Receivable (net)* 5200 4500
Inventory 21000 19000
Prepaid Expenses 1650 30350 800 30500
Non Current Assets
Plant and Equipment 76000 64000
less Acc. Depreciation (23000) 53000 (17600) 46400
Total Assets
Current Liabilities 83350 76900
Bank Overdraft 6550 -
Accounts Payable 4100 3800
Accrued Expenses 680 790
Tax Payable 720 12050 1200 5790
Non Current Liabilities
Bank Loan 24000 19000
Total Liabilities 36050 24790
Net Assets
Equity 47300 52110
Share Capital 32500 26500
Retained Earnings 14800 25610
47300 52110
*A/C Rec (2014)=5350 less Allowance for Doubtful Debts=150
A/C Rec (2013)=4900 less Allowance for Doubtful Debts = 400
(continued over the page)
FRONTERA LTD INCOME STATEMENT FOR THE YEAR ENDED JUNE 30, 2016
Net Sales $92650
Cost of Sales 55200
Gross Profit:
Other Revenue: 37300
Interest Revenue 60
Discount Received 350 410
Expenses: 37860
Selling & Admin Expense 21600
Doubtful Debts Expense** 350
Depreciation Expense 5300
Interest Expense 2100 29350
Profit before tax 8510
Income tax expense 2523
Profit $ 5987
**Bad debts written off during the year amounted to $250.
REQUIRED:
Answer this question on the separate question 3 pro forma provided.
a. Prepare a Statement of Cash Flow in the format required by the applicable accounting standard. Show all calculations in your answer.
[14 marks]
b. The owners of Frontera Limited cannot understand why there is such a difference between the profit for the period and the total cash flows. Briefly explain some of the factors causing this difference.
[2 marks]
c. What information is provided by a Statement of Cash Flow which is not provided by other Financial Statements? (ie: Income Statement, Balance Sheet and Statement of Changes in Equity)
[2 marks]
TOTAL FOR QUESTION 4: 18 Marks
Question 5
The following information has been extracted from the financial statements and notes of Pudner Ltd.
2015 2016
Sales revenue 267,805 270,135
Interest expense 12,345 10,715
Income tax expense 24,685 20,770
Profit 26,130 24,450
Total assets 258,495 251,505
Total liabilities 153,695 139,725
Ordinary share capital 46,575 51,230
Retained earnings 29,345 31,670
Preference share capital 28,880 28,880
Preference dividends paid 1,305 1,305
Required
1. Calculate the following ratios for 2016:
A. return on total assets
B. return on ordinary equity
(2 marks each)
2. Calculate the following ratios for 2015 and 2016:
A. profit margin
B. debt ratio
C. times interest earned
(A & B = 3 marks C = 4 marks)
3. What do these ratios show in relation to the company's profitability and financial stability? (200 – 250 words maximum)
(5 marks)
4. What are some of the limitations or shortcomings of ratio analysis? Give at least four different examples and provide two or three sentences explaining each example. (6 marks)
Total for Question 5: 25 marks
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