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NANYANG TECHNOLOGICAL UNIVERSITY NANYANG BUSINESS SCHOOL

 AB1102 - ACCOUNTING II  

Semester 2, 2014/2015  Seminars 2 & 3: (1) Qualitative Characteristic/Conceptual Framework (2) Accounting Measurement System /Articulation of Financial Statements (3) Presentation of Financial Statements    A) Pre-seminar preparation   a) Required readings: refer to course outline   b) Be prepared for the discussion questions  B) Discussion questions  

(1) Qualitative Characteristic/Conceptual Framework Q2 (2) Accounting Measurement System /Articulation of Financial Statements Q1 (self-study) (3) Presentation of Financial Statements Q1

 

 

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(1) Qualitative Characteristic/Conceptual Framework Question 1

 Briefly describe the contents of the Conceptual Framework for Financial Reporting. Question 2  For each independent situation below, discuss the relevant qualitative characteristics that make financial information useful.  (a) The book value of an office building is approaching its originally estimated salvage

value of $200,000. However, its current market value has been estimated at $1.2 million. The company’s management would like to report the current value of the building on the statement of financial position.

 (b) XYZ Co has used the First-In-First-Out (FIFO) inventory method for the past twenty

years. Although its main competitor uses the Weighted Average (WA) method of accounting for inventories, both methods are equally popular with the other companies in the industry. XYZ Co is contemplating a switch from FIFO to the WA method.

 (c) Prior to the issue of FRS 102, BBC Co was considering the disclosure of the “cost” of

employee stock options issued to-date in its financial statements. BBC Co believed that such disclosure would provide useful information to the sophisticated financial statement users but was concerned that other users might be “more confused than ever before”.  

 Question 3  Discuss the benefits and limitations of the Conceptual Framework.

 

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(2) Accounting Measurement System /Articulation of Financial Statements Question 1 Making a Decision as an Auditor: Effects of Errors on Income Statement and Balance Sheet Parallel Pte Ltd engaged an inexperienced accountant to prepare its financial records during its 1st year of operations ended on 31 December 20x8. An independent Certified Public Accountant (CPA) examined the accounting records and discovered numerous errors. Assume that each error is independent of the others. Net Income Assets Liabilities Owners’ equity Independent Errors 2008 2009 2008 2009 2008 2009 2008 2009 (a) Depreciation expense of $3,000 for 2008 was not recorded.

(b) Wages of $1,500 earned by employees during 2008 were not recorded or paid in 2008 but will be paid in 2009.

(c) Revenue of $3,500 earned during 2008 but not collected or recorded until 2009.

(d) Insurance premium of $1,800 paid for year 2009 was recorded as an expense in 2008.

(e) Cash of $9,000 collected from customer for services to be rendered in 2009 but was recorded as revenue in 2008.

(f) On December 31, 2008, equipment costing $20,000 was purchased on credit but not recorded until payment made on 28 January 2009.

Required:

(i) Analyze each error and indicate its effect on 20x8 and 20x9 income statement and balance sheet items if not corrected. Do not assume any other errors. Use these codes to indicate the effect of each dollar amount: O = overstated, U = understated, and NE = no effect. Write an explanation of your analysis of each transaction to support your response. (ii) Prepare the necessary correcting journal entries to rectify the errors.

 

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(i)

Suggested solution:

Net Income Assets Liabilities Owners’ equity Independent Errors 2008 2009 2008 2009 2008 2009 2008 2009 (a) Depreciation expense of $3,000 for 2008 was not recorded.

O $3,000

NE O $3,000

O $3,000

NE NE O $3,000

O $3,000

(b) Wages of $1,500 earned by employees during 2008 were not recorded or paid in 2008 but will be paid in 2009.

O $1,500

U $1,500

NE NE U $1,500

NE O $1,500

NE

(c) Revenue of $3,500 earned during 2008 but not collected or recorded until 2009.

U $3,500

O $3,500

U $3,500

NE NE NE U $3,500

NE

(d) Insurance premium of $1,800 paid for year 2009 was recorded as an expense in 2008.

U $1,800

O $1,800

U $1,800

NE NE NE U $1,800

NE

(e) Cash of $9,000 collected from customer for services to be rendered in 2009 but was recorded as revenue in 2008.

O $9,000

U $9,000

NE NE U $9,000

NE O $9,000

NE

(f) On December 31, 2008, equipment costing $20,000 was purchased on credit but not recorded until payment made on 28 January 2009.

NE NE U $20,000

NE U $20,000

NE NE NE

 

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Q1(ii) Correcting journal entries

Date Description Dr Cr $ $ (a) 31 Dec 08 Depreciation expense 3,000 Accumulated depreciation 3,000 (b) 31 Dec 08 Wages Expense 1,500 Wages Payable 1,500 ( c) 31 Dec 08 Accounts Receivable 3,500 Revenue Earned 3,500 (d) 31 Dec 08 Prepaid Insurance $1,800 Insurance Expense $1,800 (e) 31 Dec 08 Revenue Earned 9,000 Unearned revenue 89,000 (f) 31 Dec 08 Equipment 20,000 Other payable 20,000

 

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Question 2

Lee Jia Service Repair Company’s Salaries Payable Account balance stood at $3,000 and $7,000 as at 31 December 2003 and 31 December 2004 respectively. An interest-free loan of $2,000 was made on 1 September 2003 to one of its employees, settlement of which was to be made equally over a period of 10 months by way of setting off the amount against his monthly salary commencing 1 October 2003. A total of $45,000 cash was paid to its employees during the year 2004. Determine the amount of salaries expense that should be reported for the year ended December 31, 2004.

Q1(c) of AA101 Sem 1 Exam 2004/2005 Key Ans: $50,400

Question 3 During the year ended December 31, 2004, Cliffort Cleaning Company collected a total of $500,000 cash from its customers in relation to its cleaning services. Of the $500,000 received, $110,000 related to services rendered and recorded in the prior year while $60,000 was collected on 1st November 2004 for services to be rendered immediately over a 6-month period. Service revenue of $30,000 was earned for contracts completed in December 2004 but was not collected until 2005. Determine the amount of revenue that should be reported for the year ended December 31, 2004.

adapted from Q1(b) of AA101 Sem 2 Exam 2003-2004 Key Ans: $380,000

Question 4 During the year ended December 31, 2004, Soo Namee Company performed services for which customers paid or promised to pay $250,000. Of this amount, $220,000 had been collected at year-end. During the year, Soo Namee recorded salaries expense of $50,000, of which 5% still remained outstanding at year end. It incurred $40,000 for other expenses, ¼ of which had been paid in January 2005. It also declared and paid a dividend of $20,000. What was Soo Namee’s net income (net loss) for the year ended December 31, 2004?

Q1(b) of AA101 Sem 2 Exam 2004-2005 Key Ans: $160,000

Question 5

The accounting records of Pear Pte Ltd showed total assets and total liabilities of $60,000 and $20,000, respectively, as at 31 March 2007. The year-end audit revealed that cash of $2,000, collected from one of the customers in settlement of his outstanding balance, was erroneously recorded as a debit to Advertising Expense account and a credit to Cash account.

(i) Prepare journal entries to correct the above error. (ii) Determine the correct balances for each of the three elements in the accounting equation.

Q1(a) of Sem 2 Exam 2006-2007

Key answers: Assets = $62,000 ; Liabilities = $20,000; Stockholders’ equity = $42,000

 

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Question 6 TopDown Pte Ltd's list of adjusted account balances as at 31 March 2009 includes the following:

PPE, at cost $114,000 Accumulated depreciation – PPE 10,000 Accumulated impairment loss - PPE $x Accounts receivable (A/R) 20,000 Allowance for impairment of A/R $2,000 Accounts payable 16,000 Loan payable (due in 5 years) 5,000 Revenue 250,000 Cost of goods sold 170,000 Other expenses 60,000 Inventories (31 March 2009) 25,000 Bank overdraft 4,000 Sales returns & allowances 1,000 Collections on behalf of third parties $y Other accruals $3,000

As at 31 March 2009, TopDown’s total liabilities stand at $35,000 and its total debt to equity ratio is 1: 3. Determine the missing figures ($x and $y) in the table above.

Q1(a) of AA102 Sem 2 Exam 2008/2009 Key answers: $x= $7,000; $y = $7,000

 

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(3) Presentation of Financial Statements Question 1

TED Ltd is a company incorporated in Singapore, and is engaged in the manufacture of electronic components and electrical appliances. It is a partly owned subsidiary of XYZ Ltd which is also incorporated in Singapore. The trial balance of TED Ltd as at 31 December 2012 is re-produced below.

$’000 $’000 Sales 365,000 Purchases of raw materials and consumables 268,750 Bank interest 1,150 Interest on debentures 6,325 Salaries and wages 18,055 Motor vehicle expenses 9,200 Fees – audit 1,150 Utilities, repairs and maintenance 8,510 Rental expenses 1,035 Miscellaneous expenses 1,725 Income tax expense 5,750 Directors’ remuneration 1,150 Ordinary shares 24,500 Retained earnings, 1/1/12 40,250 Debentures 63,250 Bank overdraft 8,625 Provision for income tax 5,750 Trade payables 29,900 Cash in hand 4,600 Trade receivables 28,750 Inventories (FG and WIP), 1/1/12 43,125 Motor vehicles 20,700 Equipment 14,950 Freehold land (acquired 1/1/12) 57,500 Freehold buildings (acquired 1/1/12) 57,500 Accumulated depreciation – equipment 3,450

- motor vehicles 9,200 549,925 549,925

 

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The following items (i) to (v) have not been taken into account in the amounts shown in the above trial balance:

i. Inventories at 31 December 2012 consist of: Finished goods $22,875,000 Work-in-process 4,000,000 $26,875,000

ii. Depreciation is to be provided as follows: - 2% on freehold buildings using straight-line method - 10% on equipment using the reducing balance method - 25% on motor vehicles using reducing balance method

iii. Of the $8,510,000 charged to the utilities, repairs and maintenance account,

$2,300,000 was pre-paid for repairs. Also, accrued wages totaling $5,175,000 has not been accounted for.

iv. The equipment was damaged and was disposed of on the balance sheet date with zero

sales proceed.

v. The fair market value of freehold land as at 31 December 2012 was $60 million. The directors wish to account for the land at its fair value at balance sheet date.

vi. Below is an analysis of various expenses by function.

Cost of

sales Distn costs

Admin. exps

Total costs

$’000 $’000 $’000 $’000 Raw materials & consumables used plus change in inventories of FG and WIP

285,000 0 0 285,000

Salaries & wages 12,075 10,580 575 23,230 Motor vehicle expenses 9,200 0 9,200 Depreciation 1,150 3,450 575 5,175 Utilities, repairs & maintenance* 3,105 1,553 1,552 6,210 Fees – audit 0 0 1,150 1,150 Directors’ salaries** 575 0 575 1,150 Rental expenses * 519 258 258 1,035 302,424 25,041 4,685 332,150

 

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* These expenses were apportioned on the basis of the space occupied by the activity. ** The three executive directors spent half their time on production and half on

administration.

vii. Of the 17.25 million ordinary shares in issue, 7.25 million shares were issued during the year 2012 at $2 each.

viii. The financial statements, which are to be prepared in compliance with Singapore

Financial Reporting Standards were approved for issue in accordance with a resolution of the Board of Directors on 31 March 2013.

Required: a) Show the necessary journal entries for items (ii) to (v). b) Prepare the Statement of profit or loss and other comprehensive income, Statement of

financial position, Statement of changes in equity and Notes to the financial statements of TED Ltd for the financial year ended 31 December 2012 in a form suitable for publication. (Using classification of expenses by “function” for Statement of comprehensive income presentation).

c) Prepare TED Ltd’s Statement of profit or loss and other comprehensive income for the year ended 31 December 2012, using classification of expenses by “nature”.

 

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Suggested Partial solution to Question 1 (a) Journal Entries (in $’000)

ii. Depreciation expense Accumulated depreciation

iii. Salaries & wages expense

Salaries & wages payable

Prepayments Utilities, repairs and maintenance expenses

iv. Accumulated depreciation – equipment Loss on disposal (Asset written off)

Equipment

v. Freehold land Revaluation reserve

 

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(b) By “function”

TED Ltd (Incorporated in Singapore)

Statement of profit or loss and other comprehensive income for the year ended 31 December 2012

Notes S$'000 Revenue Cost of sales Gross profit Loss on disposal Distribution costs Administrative expenses Other expenses Finance cost Profit before tax [ ] Income tax expense Profit for the period Other comprehensive income Item that will not be reclassified to profit or loss: Revaluation surplus

Total other comprehensive income Total comprehensive income

     

 

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TED Ltd (Incorporated in Singapore)

Statement of financial position as at 31 December 2012 Notes $’000

ASSETS Non-current assets Property, plant and equipment

[ ]

Current assets Inventories [ ] Trade receivables Cash in hand Prepayments Total assets EQUITY AND LIABILITIES Share capital [ ] Revaluation reserve Retained earnings Total equity Non-current liabilities Debentures Total non-current liabilities Current liabilities Trade payables Provision for tax Accrued charges Bank overdraft Total current liabilities

Total equity and liabilities

[NB: Alternative presentation formats are acceptable.]

 

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TED LTD (Incorporated in Singapore)

Statement of Changes in Equity for the year ended 31 December 2012

Notes

Share capital

Revalu-ation

reserve

Retained earnings

Total

S$’000 S$’000 S$’000 S$’000 Balance at 31 December 2011 Total comprehensive income for the year Issue of share capital [ ] Balance at 31 December 2012

TED Ltd (Incorporated in Singapore)

Notes to the financial statements – for the year ended 31 December 2012 1. General Information

DEF Ltd is a limited liability company incorporated in the Republic of Singapore which is also the place of domicile. The company is a partly owned subsidiary of XYZ Ltd, incorporated in Singapore. The registered office of the company is at ………………… The principal activities of the company consist of manufacturing electronic components and electrical appliances. The financial statements for the financial year ended 31 December 2012 were authorized for issue in accordance with the resolution of the Board of Directors on 31 March 2013. The financial statements are presented in Singapore dollars because that is the currency of the primary economic environment in which the company operates. All values are rounded to the nearest thousand dollars ($’000).

 

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2. Significant Accounting Policies (a) Basis of accounting

The financial statements have been prepared in compliance with Singapore Financial Reporting Standards.

The financial statements have been prepared on the historical cost basis, except for the freehold land which is carried at revalued amount.

(b) All property, plant and equipment are carried at cost less accumulated depreciation

except for the freehold land which is carried at revalued amount.

(c) Depreciation of property, plant and equipment Property, plant and equipment are depreciated as follows: Freehold building at 2% on a straight-line basis Equipment at 10% on a reducing balance basis Motor vehicles at 25% on a reducing balance basis Freehold land is not depreciated.

(d) Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined on a ……………….. basis. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs necessary to make the sale.

3. Profit before tax has been arrived at after charging:

S$’000 Employee benefits expense Depreciation expense

[NB: Required only if the Statement of comprehensive income presentation is using “expenses classification by function”]

 

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4. Property, plant and equipment

Freeholdland

Freeholdbuilding Equipment

Motorvehicles Total

$'000 $'000 $'000 $'000 $'000Cost/ValuationAt 1 January 2012 - - 14,950 20,700 35,650 AdditionsRevaluation adjustmentDisposalAt 31 December 2012

Accumulated depreciationAt 1 January 2012 - - 3,450 9,200 12,650 Charge for the yearDisposalAt 31 December 2012

Net book valueAt 31 December 2012At 31 December 2011 - - 11,500 11,500 23,000

5. Inventories $’000 Finished goods Work-in-process _____ _____

6. Share capital

 

Number of shares (in millions)

   

Issued and fully paid share capital    

 As at 1 January 2012

     

Addition during the year    

 As at 31 December 2012

   

     The company issued 7.25 million shares at $2 per share during the year 2012.

[NB: Share capital dollar amounts ($’000) is not required to be disclosed in the notes to the financial statements as this has already been shown in the statement of changes in equity.]

[NB: Breakdown of revaluation reserve is also not required to be disclosed in the notes to the financial statements as this has already done in the statement of changes in equity.]

 

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By “nature”

TED Ltd (Incorporated in Singapore)

Statement of profit or loss and comprehensive income for the year ended 31 December 2012

Notes S$’000 Revenue Changes in inventories Raw materials & consumables used Loss on disposal Employee benefits expense Depreciation expense Transport costs Rental expenses Utilities, repairs and maintenance expenses Other expenses # Finance cost Profit before tax Income tax expense Profit for the period Other comprehensive income Item that will not be reclassified to profit or loss: Revaluation surplus

Total other comprehensive income Total comprehensive income

# This includes audit fees and miscellaneous expenses.

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