IAsgns6.docx
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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
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