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ACF5950

Introduction to Financial Accounting

Question 1

Drugs Ltd. was established in September 2019 to conduct research designed to develop products which would appeal to the growing market of students. Drug Ltd. was attempting to develop ExamHelp, a wonder drug which was expected to significantly improve short‐term memory. It was anticipated that ExamHelp would have mass appeal to people needing to remember a lot of information for several hours, e.g. students studying for examinations. This was confirmed using a market research company that reported extremely high demand for the potential drug. Drug Ltd. successfully acquired a patent for ExamHelp on 1 October 2019 which restricted anyone else from using the ExamHelp concept. Whilst the project is only in the research phase and at the concept level, there is no other product on the market that is similar to ExamHelp.

Required:

Discuss whether Drug Ltd. Should recognise ExamHelp as an asset on the balance sheet.

Question 2

On 1 July 2017, Cirrus Ltd had an opening balance for accounts receivable of $100,000 DR and an allowance for doubtful debt of $35,000 CR.

In the 12 months ending 30 June 2018, Cirrus made $360,000 of credit sales to customers .

On 15 November 2017, a customer Shifty Ltd declared bankruptcy and would not be able to pay the amount of 20,000 owed. On 13 May, 2018, Shifty Ltd managed to repay 30 cents in the dollar.

Cirrus used the percentage of credit sales method to estimate doubtful debt expense at year end of 2018. Past experience suggests that 1.5% of credit sales are uncollectible.

Starting from 1 July 2018, Cirrus switched to a percentage of accounts receivable method to estimate bad debt. At 30 June 2019, Cirrus had accounts receivable of $1,000,000 and doubtful debts were estimated based on 3% of accounts receivable.

Since 1 July 2019, Cirrus started to use an aging analysis of accounts receivable to estimate bad debt. Below is an account receivable aging chart by 30 June 2020.

Customer name	0-30 Days	31-60 Days	61-90 Days	90+ Days
Barry	$30,000	$45,000
Chris		$15,000	$100,000	$60,000
David				$30,000
Percentage	2%	5%	10%	20%

Required:

(a) Prepare an adjusting entry at 30 June 2018 for doubtful debt. Show all workings. (2 marks)

(b) Prepare a ledger account for allowance for doubtful debt based on all relevant journal entries

from 1 July 2017 to 30 June 2018. Show all workings. (6 marks)

(c) Prepare an adjusting entry at 30 June 2019 for doubtful debt. Show all workings. (3 marks)

(d) Prepare an adjusting entry at 30 June 2020 for doubtful debt. Show all workings. (4 marks)

Question 3

Cirrus Ltd is preparing its end of year financial statements at 30 June 2019. The balance sheet shows only two non-current assets, buildings and office furniture. After depreciation entries were completed for the year ending 30 June 2019, the accumulated depreciation of its non-current assets

were as follows:

Buildings 500,000

Accumulated Depreciation (80,000)

Office Furniture 180,000

Accumulated Depreciation (120,000)

The company applies the revaluation model to buildings and the cost model to office furniture. At 30 June 2019, the following values relating to the assets have been determined:

	Fair value	Value in use	Costs to sell
Buildings	$360,000	$362,000	$15,000
Office Furniture	$40,000	$30,000	$8,000

Required:

(a) Prepare the necessary general journal entries in relation to the buildings for the year ended

30 June 2019 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

(b) Prepare the necessary general journal entries in relation to the office furniture for the year

ended 30 June 2019 and justify in accordance with appropriate accounting standards. Show all workings (narrations are not required).

(c) For the year ended 30 June 2020, prepare the necessary general journal entries in relation to the Buildings (assuming depreciation for the year is $40,000 and the fair value of the buildings at 30 June 2020 was $600,000).

Question 4

VolleyViva Ltd is a distributor of tennis racquets. On 1 January 2020, VolleyViva Ltd had 200 tennis racquets on hand at a cost of $2 each.

VolleyViva Ltd’s related transactions for the month of January 2020 are as follows:

Purchased, 15 Jan 300 at $3 each

Sold, 17 Jan 250 at $10 each

Purchased, 28 Jan 500 at $4 each

Sold, 30 Jan 400 at $10 each

Required:

Prepare a stock card to record the purchase of inventory, the cost of goods sold, and the ending inventory using the perpetual, first-in-first out method.

Question 5

The financial statements for Cirrus Ltd are provided below:

Cirrus Ltd Comparative Balance Sheet As at 30 June 2019 and 2020

	2019	2020
Assets
Cash At Bank	143,000	187,600
Accounts Receivable	125,000	172,000
Inventory	80,000	100,000
Prepaid Rent	3,000	4,000
Equipment	170,000	210,000
Accumulated Depreciation – Equipment	(120,000)	(130,000)
Motor Vehicles	85,000	63,000
Accumulated Depreciation – Motor Vehicles	(31,000)	(27,000)
	463,000	579,600
Liabilities
Accounts Payable	73,000	84,000
Dividend Payable	6,000	11,000
Wages Payable	11,000	18,000
Tax Payable	7,000	4,600
Bank Loan	61,000	110,000
	158,000	227,600
Equity
Capital	203,000	225,000
Retained Earnings	102,000	127,000
	305,000	352,000

Cirrus Ltd

Income Statement

For the Year Ended at 30 June 2020

Sales		1,700,000
COGS		(850,000)
Gross Profit		850,000
Profit on sale of Motor Vehicle		4,000
Rent	66,000
Wages	610,000
Interest	11,000
Depreciation Expense	10,000
Depreciation Expense Motor Vehicles	15,000
		(712,000)
Net Profit before Tax		142,000
Less Taxation expense		(42,000)
Net Profit		100,000