Chegg India Pvt. Ltd.

MNE Test Paper – Accountancy

Answer any 5 Questions

Each Question Carries 10 Marks

1. At the beginning of the current season, the ledger of Highland Tennis Shop showed Cash
$2,500; Inventory $1,700; and Common Stock $4,200. The following transactions were
completed during April.

Apr. 4 Purchased racquets and balls from Harris Co. $980, terms 2/10, n/30.

6 Paid freight on Harris Co. purchase $60.

8 Sold merchandise to members $750, terms n/30.

10 Received credit of $130 from Harris Co. for damaged racquets that were returned.

11 Purchased tennis shoes from Happy Feet for cash $300.

13 Paid Harris Co. in full.

14 Purchased tennis shirts and shorts from Rivera Sportswear $1,300, terms 3/10, n/60.

15 Received cash refund of $50 from Happy Feet for damaged merchandise that was returned.

17 Paid freight on Rivera Sportswear purchase $60.

18 Sold merchandise to members $660, terms n/30.

20 Received $500 in cash from members in settlement of their accounts.

21 Paid Rivera Sportswear in full.

27 Granted an allowance of $30 to members for tennis clothing that did not fit properly.

30 Received cash payments on account from members $550.

The chart of accounts for the tennis shop includes Cash, Accounts Receivable, Inventory,
Accounts Payable, Common Stock, Sales Revenue, Sales Returns and Allowances, Purchases,
Purchase Returns and Allowances, Purchase Discounts, and Freight-in.
Requirements:

(a) Journalize the April transactions using a periodic inventory system.

(b) Using T accounts, enter the beginning balances in the ledger accounts and post the April
transactions.

(c) Prepare a trial balance on April 30, 2012.

(d) Prepare an income statement through Gross Profit, assuming merchandise inventory on hand
at April 30 is $3,244.

2. Mountain States Cable Co. provides cable TV and Internet service to the local
community. The activities and activity costs of Mountain States are identified as follows:

Activities Activity Cost

Billing error correction $48,200
Cable signal testing 100,500
Reinstalling service (installed incorrectly the first time) 103,700
Repairing satellite equipment 26,800
Repairing underground cable connections to the customer 31,400
Replacing old technology cable with higher quality cable 126,600
Replacing old technology signal switches with higher quality 144,700
switches
Responding to customer home repair requests 57,900
Training employees 30,200
Total $670,000

Requirements:

1. Classify each activity as either prevention, appraisal, internal failure or external failure.
Prepare a cost of quality report. Assume that sales are $2,680,000. If required, round percentages
to two decimal places.

2. Prepare a value-added/non-value-added analysis.

 3. All four parts are independent of all other parts. Assume that all cash flows are after-tax
cash flows.

a. Kambry Day is considering investing in one of the following two projects. Either project will
require an investment of $20,000. The expected cash flows for the two projects follow. Assume
that each project is depreciable.

Year Project A Project B

1 6,000 6,000
2 8,000 8,000
3 10,000 10,000
4 10,000 3,000
5 10,000 3,000

b. Wilma Golding is retiring and has the option to take her retirement as a lump sum of $450,000
or to receive $30,000 per year for 20 years. Wilma’s required rate of return is 6 percent.

c. David Booth is interested in investing in some tools and equipment so that he can do
independent drywalling. The cost of the tools and equipment is $30,000. He estimates that the
return from owning his own equipment will be $9,000 per year. The tools and equipment will last
six years.

d. Patsy Folson is evaluating what appears to be an attractive opportunity. She is currently the
owner of a small manufacturing company and has the opportunity to acquire another small
company’s equipment that would provide production of a part currently purchased externally.
She estimates that the savings from internal production will be $75,000 per year. She estimates
that the equipment will last 10 years. The owner is asking $400,000 for the equipment. Her
company’s cost of capital is 8 percent.

Requirements:

1. What is the payback period for each of Kambry Day’s projects? If rapid payback is important,
which project should be chosen? Which would you choose?

2. Which of Kambry Day’s projects should be chosen based on the ARR? Explain why the ARR
performs better than the payback period in this setting?

3. Assuming that Wilma Golding will live for another 20 years, should she take the lump sum or
the annuity?

4. Assuming a required rate of return of 8 percent for David Booth, calculate the NPV of the
investment. Should David invest?

5. Calculate the IRR for Patsy Folson’s project. Should Patsy acquire the equipment?
 4. Lilly County, faced with the prospect of declining revenues, decides it can save money by
doing all printing in-house. The county creates the Lilly Printing Fund (an Internal
Service Fund), directs departments to fulfill their bulk printing needs through that fund,
and directs departments to pay the fund promptly to minimize its working capital needs.
The fund had the following transactions and events during 2013:

1. Received a loan on January 2 from the county in the amount of $6,000, to be repaid in four
equal annual installments of $1,500, starting December 31, 2013, with interest at the rate of 1
percent per annum on the outstanding balance. The specified purpose of the loan was to purchase
equipment for $4,800 and to use the balance of $1,200 to meet working capital needs.

2. Purchased reproduction equipment for $4,800 on January 2, using cash provided in

transaction1. The equipment has an estimated useful life of 4 years and no salvage value.

3. Purchased paper and supplies for $4,500 on credit. (Because inventories are kept to a mini-
mum, charge the purchase to Supplies expense.)

4. Sent invoices for $65,000 to departments financed by the general fund.

5. Received cash in the amount of $63,000 as a result of transaction 4.

6. Paid the $4,500invoice received in transaction 3.

7. Paid salaries in the amount of $50,000 and utility bills in the amount of $6,000

8. Repaid the county $1,500 of principal on the loan, plus interest of 1 percent.

9. In preparation for year-end financial statements, recorded depreciation on the equipment for
12 months.

Requirements:

Prepare –

(a) Journal entries to record these transactions in the Lilly Printing Fund;

(b) A statement of net position as of December 31, 2013; and

(c) A statement of revenues, expenses, and changes in net position for the year ended December
31, 2013.
 5. Deleon Inc. is preparing its annual budgets for the year ending December 31, 2014.
Accounting assistants furnish the data shown below:

Product Product
JB 50 JB 60
Sales budget:
Anticipated volume in units 400,000 200,000
Unit selling price $20.00 $25.00
Production budget:
Desired ending finished goods units 25,000 15,000
Beginning finished goods units 30,000 10,000
Direct materials budget:
Direct materials per unit (pounds) 2 3
Desired ending direct materials pounds 30,000 15,000
Beginning direct materials pounds 40,000 10,000
Cost per pound $3 $4
Direct labor budget:
Direct labor time per unit 0.4 0.6
Direct labor rate per hour $12 $12
Budgeted income statement:
Total unit cost $12 $21

An accounting assistant has prepared the detailed manufacturing overhead budget and the selling
and administrative expense budget. The latter shows selling expenses of $660,000 for product JB
50 and $360,000 for product JB 60, and administrative expenses of $540,000 for product JB 50
and $340,000 for product JB 60. Income taxes are expected to be 30%.

Requirements:

Prepare the following budgets for the year:

1. Sales
2. Production
3. Direct material
4. Direct labor
5. Income statement
 6. Comparative financial statement data for Duran Corporation and Kiepert Corporation,
two competitors, appear below. All balance sheet data are as of December 31, 2012.

Requirements:

(a) Comment on the relative profitability of the companies by computing the net income and
earnings per share for each company for 2012.

(b) Comment on the relative liquidity of the companies by computing working capital and the
current ratios for each company for 2012.

(c) Comment on the relative solvency of the companies by computing the debt to total assets
ratio and the free cash flow for each company for2012.

7. ABC Company maintains a petty cash fund for small expenditures. The following
transactions occurred over a 2-month period.

July 1-Established petty cash fund by writing a check on STT Bank for $205.00

July 15-Replenished the petty cash fund by writing a check for $201.20. On this date, the fund
consisted of $3.80 in cash and the following petty cash receipts: freight-out $92.10, postage
expense $40.80, entertainment expense $48.80, and miscellaneous expense $18.23.

July 31-Replenished the petty cash fund by writing a check for $197.00. At this date, the fund
consisted of $8.00 in cash and the following petty cash receipts: freight-out $80.30, charitable
contributions expense $45.10, postage expense $34.30, and miscellaneous expense $37.30.
Aug. 15-Replenished the petty cash fund by writing a check for $191.10. On this date, the fund
consisted of $13.90 in cash and the following petty cash receipts: freight-out $77.00,
entertainment expense $41.10, postage expense $34.20, and miscellaneous expense $40.20.

Aug. 16-Increased the amount of the petty cash fund to $305.00 by writing a check for $100.00.

Aug. 31- Replenished petty cash fund by writing a check for $287.10. On this date, the fund
consisted of $17.90 in cash and the following petty cash receipts: postage expense $138.20,
travel expense $96.10, and freight-out $51.40.

Journalize the petty cash transactions.

8. The ledger of Custer Company has the following work in process account.

Work in process- Painting

5/1 Balance 3,590 5/3 Transferred out ?
1
5/3 Materials 5,160
1
5/3 Labor 2,740
1
5/3 Overhead 1,380
1
5/3 Balance ?
1

Production records show that there were 400 units in the beginning inventory, 30% complete,
1,400 units started, and 1,500 units transferred out. The beginning work in process had materials
cost of $2,040 and conversion costs of $1,550. The units in ending inventory were 40%
complete. Materials are entered at the beginning of the painting process.

Requirements:

1. How many units are in process at May 31?

2. What is the unit materials cost for May?

3. What is the unit conversion cost for May?

4. What is the total cost of units transferred out in May?

5. What is the cost of the May 31 inventory?