Courses
Duration of the Exam
Exam, date
: Accounting 6011P0148 /6011P0150
: 3 hours, 09:00 – 12:00
: 18 December 2014
Covers the subjects of term
This exam consists of
Worksheets
: 1st semester, 2nd Block 2014 – 2015
: 4 problems
: 4 sets
The solutions of the exam will be posted on Blackboard.
Exam review (tentamen inzage) time and place will be posted on Blackboard
(http://blackboard.ic.uva.nl/courses/6011P0148-6011P0150)
The results (disregarding unexpected circumstances) will be announced in three weeks at the usual website of
the FEB.
General Instructions for the Exam
1.
Write your name, student number and test number (supplied by the invigilator) clearly on all your documents of the
exam.
2.
If asked you have to be able to identify yourself, so put your ID on your table. For ID you may use: passport, driving
license, or University-of-Amsterdam registration card.
3.
You have to report any incompleteness regarding the questions and problems during the test to the invigilators.
4.
You must answer the problems on your own. You may answer in English or in Dutch.
5.
The use of a calculator, as long as it is noiseless, and is working on batteries, is permitted. Graphical calculators are
NOT allowed. You may also use an unmarked dictionary.
6.
The use of paper not provided by the invigilators is prohibited. You can use the blank backsides of the paper on
which the test is printed, or you can ask the invigilators for additional paper.
7.
The set of questions and problems can be taken home. When you have finished the exam, you have to hand in all
worksheets.
8.
You can only leave your table if the invigilator allows you to. In case of any question you have to warn an
invigilator. You have to remain seated for the first 30 minutes of the exam.
9.
Always show your calculations. Answers without calculations will not receive any points.
10. If necessary, round your answers to two decimals.
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In case of violation of the instructions the invigilator is allowed to take in your worksheets and remove you from the
room. The invigilator reports the violation to the Examination Commission of the FEB.
Problem 1: Journal Entries
(Max 25 points)
The following are the transactions relating to the formation of Excellent Mowing Services, Inc.
and its first month of operations. The firm uses a periodic system to account for supplies.
Required:
Write the journal entries for each of the transactions described below. When recording the
transactions, you can use the following accounts (note: you do not have to use all accounts):
Accounts payable
Accounts receivable
Accumulated depreciation
Accumulated interest
Cash
Discount on short term debt
Equipment
Loss on sale of supplies
Marketing expenses
Notes payable
Paid-in-Capital
Purchase discounts
Retained earnings
Service revenue
Supplies expense
Supplies inventory
Wage expense
Wages payable
a. Initial stockholders invested cash of $ 6,000.
b. The company borrowed $ 9,000 on a straight basis from a relative of one of the initial
stockholders; a short-term note payable was signed. The interest rate is 5%.
c. Two lawn mowers costing $ 4,800 each and a professional trimmer costing
$ 1,300 were purchased for cash. The original price of each mower was $ 6,100, but a
discount was received because the seller was having a sale.
d. Gasoline, oil, and several packages of trash bags were purchased for cash of $ 900.
e. Advertising flyers announcing the formation of the business and a newspaper ad were
purchased. The cost of these items, $ 1,700 will be paid in 30 days.
f.
Employees were paid $ 4,200 for their work during the first two weeks.
g. More gasoline and oil were purchased, this time on credit. Total amount of the invoice is
$ 1,000. The supplier has credit terms 2/10, n/30. The firm uses the net method to
recognize cash discounts in its administration.
h. During the first month of operations, 98 lawns were mowed. The total revenue for this
work was $ 16,250 of which $ 8,400 was collected in cash.
i.
Employee wages for the last two weeks totaled $ 5,100; these will be paid during the first
week of the next month.
j.
The invoice for gasoline and oil (from transaction g) was paid five days after the invoice
date, taking the cash discount.
k. It was determined that at the end of the month the cost of the gasoline, oil, and trash bags
still on hand was $ 300.
2
Problem 2: Financial Statements of a manufacturing firm (Max 25 points)
Below are the income statement for the year 2013 as well as the balance sheets at the end of 2012
and at the end of 2013 for RowdyBear BV. RowdyBear BV produces one single product: a toy
bear that speaks and is controllable through a mobile phone app. RowdyBear BV uses a standard
costing system. The standard cost of producing one bear is €10, and is calculated as shown below.
In the year 2013 there were no direct costs variances or overhead variances. Also, there is no
work-in-process at the beginning or at the ending of the year.
Balance sheet
Current Assets
Cash
Accounts receivable
Raw materials inventory
Finished goods Inventory
Noncurrent Assets
Office Equipment (net of depreciation)
Current Liabilities
Accounts payable
Noncurrent Liabilities
Long-term bank loan
Owners’ equity
Paid-in capital (7,000 shares at €1 par)
Additional paid-in-capital
Retained earnings
31-12-2013
31-12-2012
€7,550
€10,500
€8,500
€5,500
€3,000
€3,500
€5,000
€5,500
€15,750
€17,500
€3,500
€1,750
€10,000
€10,000
€7,000
€7,000
€7,000
€7,000
€20,300
€8,750
Income statement 2013
Sales Revenue
Cost of Goods Sold
Interest expense (10%)
€70,000
€50,000
€1,000
Income before tax
€19,000
€5,700
Income tax expense (30%)
€13,300
Net income
3
Standard Cost calculation
Direct materials
Direct labor
Allocated fixed overhead (including depreciation of office equipment)
€4
€2
€4
Standard cost per unit
€10
Required:
a. Calculate working capital on 31-12-2012 and 31-12-2013.
b. Calculate the acid test ratio on 31-12-2012 and 31-12-2013.
c. Calculate accounts receivable turnover in 2013.
d. Assume that RowdyBear paid out a cash dividend of €0.25 per share in 2013.
Calculate the dividend payout ratio.
e. How many units did RowdyBear BV need to sell in 2013 in order to break even in
terms of income before taxes?
f. How many units did RowdyBear BV need to sell in 2013 in order to arrive at a net
income of €21,000 (assume taxable income is equal to income before tax).
g. Explain in words what financial leverage is. Also explain whether the financial
leverage of RowdyBear BV has changed over 2013, and, if so, how.
h. Explain in words what operating leverage is.
4
Problem 3: Statement of Cash Flows
(Max 25 points)
Blue Spirit’s balance sheets as of December 31, 2013 and 2012 and its income statement for the
year ended December 31, 2013 are presented below (in €).
Blue Spirit Balance sheets as of December 31, 2013 and 2012
2013
2012
Current assets
Cash
Accounts receivable
Accrued revenues
Inventories
Total current assets
247,000
289,000
23,000
285,000
801,000
98,000
201,000
37,000
212,000
548,000
Long-term assets
Equipment
Buildings
Land
Total long-term assets
800,000
509,000
200,000
1,509,000
750,000
434,000
200,000
1,384,000
Total assets
2,300,000
1,932,000
411,000
79,000
11,000
80,000
581,000
281,000
57,000
32,000
86,000
456,000
Long-term liabilities
Mortgage payable
Bonds payable
Notes payable
Total long-term liabilities
Total liabilities
117,000
250,000
191,000
505,000
1,086,000
250,000
271,000
521,000
977,000
Stockholders’ equity
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Total stockholders’ equity
500,000
240,000
474,000
1,214,000
500,000
230,000
265,000
-40,000
955,000
Total liabilities and stockholders’ equity
2,300,000
1,932,000
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Income taxes payable
Accrued interest on liabilities
Accrued other expenses
Total current liabilities
5
Blue Spirit Income Statement for the year ended December 31, 2013
Revenues
Sales
Expenses
Cost of goods sold
Depreciation of long-term assets
Other operating expenses
Interest expense
Total expenses
Loss on sale of equipment
Income before income taxes
Income taxes expense
Net income
3,285,000
2,400,000
250,000
110,000
48,000
2,808,000
4,000
477,000
118,000
359,000
Additional information about the company’s transactions during 2013
During 2013 Blue Spirit entered into the following transactions:
1. Purchased buildings in exchange for a long-term mortgage in the amount of €130,000.
2. Purchased equipment at €290,000 in cash.
3. Sold equipment that cost €114,000 with accumulated depreciation of €65,000 for €45,000
cash.
5. Declared and paid cash dividend in the amount of €150,000.
6. Repaid €80,000 on a long-term note payable.
7. Sold all treasury stock at €50,000 cash. During 2013 no purchase of treasure stock has been
made.
Required
Prepare a statement of cash flows, for the year ended at December 31, 2013, using the
indirect method.
6
Problem 4: Variance Analysis
(Max 25 points)
LoLaLeather Ltd. is a company specializing in leather products. One of its business units
manufactures and sells leather travel bags. It operates a standard costing system. For October
2014, the budgeted production and sales is 640 units. The standard cost price per travel bag is
calculated as follows:
Leather:
0.6 m² at € 30 per m²
€18.00
Direct labor:
2 hours at € 16 per hour
€32.00
Allocated variable overhead:
€ 5 per labor hour
€10.00
Allocated fixed overhead:
€ 15 per unit
€15.00
€75.00
Standard unit costs
The budgeted selling price is € 99.00.
On November 17, the actual results over October 2014 are known. Actual production was 660
units. During the month, 488 m² of leather was used, for which a total of € 13,664 was paid. Also,
1287 hours of labor were used at a cost of € 21,879. Actual fixed overhead costs in October 2014
were € 10,300, while actual variable overheads totaled € 7,722. The actual sales were 660 units at
an average price of € 98.00 per unit.
Required:
a.
Calculate the budgeted and the actual profit in October 2014.
b.
Calculate the price and usage variance for direct materials. Indicate whether the
variances are favorable or unfavorable.
c.
Calculate the rate and efficiency variance on direct labor. Indicate whether the
variances are favorable or unfavorable.
d.
Calculate the spending and efficiency variance on variable overhead. Indicate
whether the variances are favorable or unfavorable.
e.
Calculate the fixed-overhead budget variance and the fixed overhead volume
variance.
f.
Explain the different options that firms have for accounting for standard cost
variances in their accounting system.
7
ANSWERS & guide to grading
Problem 1: Journal Entries
(a)
(Max 25 points)
Cash
Paid-in-Capital
(b)
Cash
6000
Equipment
9000
10900
Supplies Inventory
900
Marketing expenses
Wage expense
1700
4200
Supplies Inventory
Cash
Accounts receivable
980
Wages expense
16250
Accounts payable
5100
Max 2 points
980
Cash
(k)
Max 2 points
5100
Wages payable
(j)
Max 3 points
8400
7850
Service revenue
(i)
Max 3 points
980
Accounts payable
(h)
Max 2 points
4200
Cash
(g)
Max 2 points
1700
Accounts payable
(f)
Max 2 points
900
Cash
(e)
Max 2 points
10900
Cash
(d)
Max 2 points
9000
Notes payable
(c)
Max 2 points
6000
980
Supplies expense
Max 3 points
1580
Supplies inventory
8
1580
Problem 2: Financial Statements of a manufacturing firm (Max 25 points)
a. Calculate working capital on 31-12-2012 and 31-12-2013. (Max 2 points)
31-12-2012: €15,250
31-12-2013: €28,550
b. Calculate the acid test ratio on 31-12-2012 and 31-12-2013. (Max 2 points)
31-12-2012: 3.71
31-12-2013: 5.16
c. Calculate accounts receivable turnover in 2013. (Max 2 points)
10
d. Assume that RowdyBear paid out a cash dividend of €0.25 per share in 2013.
Calculate the dividend payout ratio. (Max 3 points)
EPS = €1.90
Dividend payout ratio = 0.25/1.9 = 13.16%
e. How many units did RowdyBear BV need to sell in 2013 in order to break even in
terms of income before taxes? (Max 4 points)
Units sold = 50000 / 10 = 5000
Sales price = 14
Fixed costs: 4 x 5000 + 1000 = 21000
CM = 14-6 = 8
BE point = 2625 units
f.
How many units did RowdyBear BV need to sell in 2013 in order to achieve a net
income of 21000 (assume taxable income is equal to income before tax). (Max 6
points)
This means that 0.3% of income before tax goes to the tax authorities.
So Income before tax = net income / 0.7
21000 net income requires 30000 income before tax.
21000+30000 = 6375 units
g. Explain in words what financial leverage is. Also explain whether the financial
leverage of RowdyBear BV has changed in 2013, and, if so, how. (Max 3 points)
Financial leverage refers to the difference between ROI and ROE that arises if a firm uses
fixed income securities (such as long term debt) to finance its assets. During the year
equity has increased more than debt so financial leverage has decreased.
h. Explain in words what operating leverage is. (Max 3 points)
A business that has a higher proportion of fixed costs and a lower proportion of variable
costs is said to have higher operating leverage. Firms with higher operating leverage
experience higher variation in profits due to changes in sales levels than firms with
lower operating leverage.
9
Problem 3: Statement of Cash Flows
(Max 25 points)
Net income
Depreciation of long-term assets
Loss on sale of long-term assets
Increase in accounts receivable
Decrease accrued revenue
Increase in inventories
Increase in accounts payable
Increase in income taxes payable
Decrease accrued interest
Decrease in accrued other expenses
359,000
246,000
4,000
-88,000
14,000
-73,000
130,000
22,000
-21,000
-6,000
Net cash flow from operating activities
587,000
Cash flows from investing activities
Purchase of Equipment
Sales of equipment
-290,000
45,000
Net cash flow from investing activities
-245,000
Cash flows from financing activities
Repayment of mortgage payable
Repayment of notes payable
Sales of treasury stock
Payment of dividends
-13,000
-80,000
50,000
-150,000
Net cash flow from financing activities
-193,000
Net cash flow
Cash at beginning of period
Cash at end of period
149,000
98000
247,000
10
Problem 4: Variance Analysis
a.
(Max 25 points)
Calculate the budgeted and the actual profit in October 2014. (Max 3 points)
Budgeted profit
Actual profit
b.
€ 15,360
€ 11,115
Calculate the price and usage variance for direct materials. Indicate whether the
variances are favorable or unfavorable. (Max 4 points)
Direct materials
Standard quantity
Actual quantity
Standard price
Actual price
Price variance
Quantity variance
c.
976 F
-2760 U
Calculate the rate and efficiency variance on direct labor. Indicate whether the
variances are favorable or unfavorable. (Max 4 points)
Direct labor
Standard quantity
Actual quantity
Standard price
Actual price
price variance
Quantity variance
d.
396
488
30
28
1320
1287
16
17
-1287 U
528 F
Calculate the spending and efficiency variance on variable overhead. Indicate
whether the variances are favorable or unfavorable. (Max 6 points)
Variable overhead
Actual costs
Std units
Actual units
Actual units * std rate
Std units * std rate
Spending variance
Efficiency variance
11
7722
1320
1287
6435
6600
-1287 U
165 F
e.
Calculate the fixed-overhead budget variance and the fixed overhead volume
variance. (Max 6 points)
Fixed overhead
Actual costs
Applied
Budgeted
Volume variance
Budget variance
f.
10300
9900
9600
300 F
-700 U
Explain the different options that firms have for accounting for standard cost
variances in their accounting system. (Max 2 points)
The variances can be included in the costs of goods sold or can be allocated to GOGS and
the work in process and/or finished goods inventories.
12