RIO CLARO WEST

SECONDARY
ACCOUNTING UNIT 1 MOCK EXAM
PAPER 02. FORM LOWER 6.

Time : 2 hours 45 minutes

1. Three questions
2. Each is worth 35 marks.
3. All questions must be attempted.
4. Calculators are allowed.
 -2-

1 (a) The Five Seasons Hotel has the following internal control procedures over cash
disbursements. Explain the internal control PRINCIPLE that is applicable to each
procedure.

(i) Company cheques are pre-numbered.

(ii) The bank statement is reconciled monthly by an internal auditor.
(iii) Cheques must be signed by the Financial Controller and an Operations
assistant.
(iv) Blank cheques are stored in a fire-proof safe in the Financial Controller’s
Office.
(v) Persons who sign cheques are not allowed to record cash disbursement
transactions.
[10 marks]

(b) The table below presents a number of accounting procedures and practices in Red Sea
Corporation. Each item listed violates an accounting assumption, principle,
information characteristic or modifying convention.

Item Item Description

Number

1 An officer of Red Sea Corporation charges the cost of his life

insurance premium as an administrative expense.

2 A machine, which cost $180 000 is reported at its current market

value of $200 000.

3 Red Sea Corporation recognised all its sales revenue on a cash basis.

4 Red Sea Corporation wishes to change from FIFO method of stock

valuation to LIFO method because the company is paying too much
tax.

5 Red Sea Corporation’s lawyers advised the company that it was

possible that Red Sea would be awarded $2 000 000 in damages and
Red Sea recorded the amount as a receivable.

For EACH item, identify the assumption, principle, information characteristic or

modifying convention that is being violated and state the purpose of that assumption,
principle, information characteristic or modifying convention.

[15 marks]
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(c) The Charter of Bogata Corporation authorizes the issuance of 10 000 shares of Class
A preferred stock, 2 000 shares of Class B preferred stock and 20 000 shares of
common stock. During a two-month period, the following stock issuance occurred.

Nov 17 Issued 4 000 shares of $2 per common stock at $12.50.

Dec 4 Sold 600 no par Class A preferred stock at $5.00, for $3 000
cash.

Dec 15 Received inventory valued at $15 000 and equipment with

market value of $25 000 for 6500 shares of $1 par common
stock.

Dec 29 Issued 2 000 shares of $1 shares of 5% no par preferred stock

with stated value of $50 per share. The issue price was cash of
$60 per share.

Prepare the journal entries for the transactions above. [10 marks]

Total 35 marks
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2. Carnival Company is involved in the wholesaling and retailing of office supplies. The
accountant resigned immediately after the following trial balance was extracted from
the books of the company as at December 31, 2009, the end of the company’s fiscal
year.

Account Titles Debit ($) Credit ($)

Cash 50 100
Accounts Receivable 128 100
Allowance for doubtful debts 27 000
Merchandise inventory 114 000
Store supplies 16 500
Investments 285 000
Store equipment 255 000
Accumulated Depreciation - Store 54 000
equipment
Delivery Equipment 144 000
Accumulated Depreciation - Delivery 27 000
Equipment
Accounts Payable 145 500
Utilities payable 8 400
Notes payable 180 000
Issued ordinary share capital 120 000
Share premium 210 000
Retained earnings 102 750
Sales 2 273 400
Sales returns and allowances 12 600
Purchases 1 384 800
Purchases returns, allowances and 44 400
discounts
Rent and utilities expense 114 000
Freight-in 32 400
Salaries expense 420 000
Advertising expense 39 600
Delivery expense 72 000
General expense 64 350
Interest expense 48 600
Loss due to flood 11 400
Total 3 192 450 3 192 450
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An accounts clerk prepared the following additional information that should be

considered in preparing the financial statements:

1. Store supplies on hand totalled $8 000 at the end of the period

2. Depreciation is charged on all fixed assets at the rate of 20 per cent per
annum using the reducing balance basis.
3. Merchandise inventory on hand at December 31, 2009 is $120 000.
4. Bad debts expense is estimated at 2 per cent of net sales.
5. Salaries expense is 60 per cent selling and 40 percent administrative.
6. Rent and utilities expense is 70 per cent selling and 30 percent
administrative.
7. $100 000 of the notes payable is due for payment the following year.
8. General expense is 100 percent administrative.
9. The corporation tax rate is 30 per cent.
10. Accounts receivable includes $5 500 due from a customer who went
into liquidation on December 15, 2009.
11. The company suffered minor losses due to seasonal flooding.
12. The investments are government bonds that will mature on December
1, 2020. The bonds pay 8 percent interest annually and were acquired
in 2006.

You have just been hired and given the trial balance and additional information above.
The directors of the company need a set of financial statements for their board
meeting.

Prepare a Statement of Comprehensive Income and Statement of Financial

Position for Carnival Company for the year ending December 31, 2009. The
statements should comply with the requirements of the International Accounting
Standards and International Financial Reporting Standards.

Total 35 marks
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3. The financial statements of M J M Ltd. for the financial year 2008 are presented
below.

M J M Ltd.
Statement of Comprehensive Income
For the year ended December 31,
2008

$ $
Sales 245 000
Less: Cost of goods sold (105 000)
Gross profit 140 000
Less: Selling and administrative expenses 97 500
Depreciation expense 7 500
Interest expense 500 (105 500)
34 500
Less: Loss on sale of machinery (1 500)
Income before taxes 33 000
Less: income tax expense (11 000)
Net income 22 000

M J M Ltd.
Statement of Financial Position
For the year ended December 31, 2008

Assets

$ $
2008 2007
Cash 2 500 22 500
Accounts receivable (net) 26 000 18 500
Inventory 20 500 12 500
Machinery (net) 30 000 30 000
Total Assets 79 000 83 500

Liabilities & Stockholders’ Equity

$ $
Accounts payable 13 500 32 000
Long-term note payable 2 500 10 000
Common stock, $5 par value 2 500 2 000
Paid in capital in excess of par value 10 000 8 000
Retained earnings 50 500 31 500
Total liabilities and stockholders’ equity 79 000 83 500
 -7-

The following additional information also applies to M J M Ltd.

1. Common stock (100 shares) were sold for $25 per share in the
middle of 2008
2. Dividends of $6 per share were declared and paid late in 2008.
3. Machinery that cost $10 000 but has a book value of $6 500 was sold
for
$5 000 cash. New machinery was purchased for $14 000 cash.
4. The note payable relates to a borrowing transaction.

(a) Using the indirect method, prepare a Statement of Cash Flow for M J M
Ltd for the year ended December 31, 2008.
[20 marks]

(b) Calculate the following for M J M Ltd for 2008.

(i) Current ratio [1 mark]

(ii) Acid test Ratio [1 mark]
(iii) Net Income Percentage [2marks]
(iv) Return on Total Assets [2marks]
(v) Debt to Equity [2marks]
(vi) Times Interest Earned [2marks]

(c) Discuss the liquidity & solvency of M J M Ltd. [5marks]

Total 35 marks

END OF TEST
IF FINISED BEFORE TIME IS CALLED, PLEASE CHECK OVER WORK.