Units 3 and 4 Accounting
Practice Exam Solutions
Stop!
Don’t look at these solutions until you have attempted the exam.
Any questions?
Check the Engage website for updated solutions, then email [email protected].
Engage
Section A – Multiple-choice questions
Marks allocated are indicated by a number in square brackets, for example, [1] indicates that the line is worth one mark.
Question 1a
Current Assets $ $ Current Liabilities $ $
Stock Control 5000 Creditors Control/Dale's Disco 5500 GST Clearing 500 5,500 Non Current Liabilities
Non Current Assets Owner's Equity
Van 30,000 Capital 35,000
Less Acc. Dep of Van -1,000 29,000 Office furniture 6,000 35,000
TOTAL 40,500 TOTAL 40,500
Stock control and GST Clearing [1] Creditors Control and office furniture [1] Van [1]
Correct van depreciation [1] Capital and totals [1] Question 1b
Depreciation is allocated so that an accurate profit can be determined for a given reporting period. This is achieved by matching the revenue earned by an asset with the expense allocated as depreciation. Therefore those assets which contribute more to revenue at the start of their useful life should use the reducing balance method. This is because they are seen as more productive at the beginning of their useful life and less so at as the asset ages. Due to the presence of moving parts and becoming outdated quickly, the van satisfies the reducing balance method criteria.
The office furniture is unlikely to become outdated or deteriorate quickly, and is thus likely to contribute to revenue evenly, therefore the straight line method is appropriate.
Question 1c
An asset is a resource controlled by the entity, as a result of past events, which represents the future inflow of economic benefits to the entity.
GST receivable is controlled by the business as a result of the stock purchase transaction, which will result in an inflow of economic benefits when the ATO pays a GST refund to the business for a debit GST balance.
Definition of an asset [1]
Question 2a
General Ledger Subsidiary Ledger
Date Details Debit Credit Debit Credit
Jan 30th Sales Returns 1500
GST Clearing 150
Debtors Control 1650
Party Warehouse 1650
Stock Control 750
Cost of Sales 750
Sales returns and GST Clearing [1]
Debtors Control and Party Warehouse subsidiary account [1] Stock Control and Cost of Sales [1]
Question 2b
Assets decrease by $900 – Debtors decrease $1650, Stock increases $750 Liabilities – GST – decrease by $150
Owner’s Equity decreases by $750 – net sales decrease by $1500, net expenses decrease $750. Each of assets, liabilities and owner’s equity [1]
Question 2c General Ledger Stock Control
Date Cross-reference Amount Date Cross-reference Amount 1st Jan Balance 10,500 30th
Jan
Cost of Sales 1,975
30th Jan
Cost of Sales 750 Balance 9,275
TOTAL 11,250 11,250
1st Feb Balance 9,275 Debit cost of sales and balance [2]
Credit cost of sales [1] Subsidiary Ledger: Party Warehouse
Date Cross-reference Amount Date Cross-reference Amount
1st Jan Balance 2,100 2nd Jan Bank 2,100
Sales/ GST Clearing 550 15th Jan Bank/ Discount Expense 550 15th Jan Sales/ GST Clearing 1,650 30th Jan Sales Returns/ GST Clearing 1,650
29th Jan Sales/ GST Clearing 220 31st Jan Balance 220
4,520 4,520
1st Feb Balance 220
All debit Sales/GST Clearing entries and balance [1] 2nd Jan credit entry [1]
15th Jan credit entry [1]
Sales Returns/GST Clearing entry [1] Question 2d
Debtors Balance as at 1st February 2015
Party Warehouse 220
Helium House 440
Joe's Sounds 385
Max's Markers 1,100
TOTAL 2,145 Party Warehouse entry [1]
Question 3a Item: Smart
Watch
Cost Assignment Method: FIFO Supplier: Andsung
IN OUT BALANCE
Date Dec 2015
Details QTY COST TOTAL QTY COST TOTAL QTY COST TOTAL
Balance 5 300 1500 2 350 700 2nd Memo 5 1 300 300 4 300 1200 2 350 700 10th Inv. 24 10 350 3500 4 300 1200 12 350 4200 14th Rec. 10 4 300 1200 0 1 350 350 11 350 3850 16th CR 12 1 350 1 300 300 1 300 12 350 4200 31st Memo 6 1 300 300 12 350 4200 Each entry [1] Question 3b
Advertising expense (as no drawings made). Question 3c
Stock loss overstated [1]
Advertising expense understated [1] Net profit no effect [1]
Question 3d
Sales: $3100 Cost of Sales: $1550 Gross Profit: $1550 Less Stock Loss: $300 Adjusted Gross Profit: $1,250 Sales and Cost of Sales [1] Stock loss [1]
Profit totals [1] Question 3e
$300 + $30 import charge = $330 OR
$300 + $30 import charge + $3 complementary case = $333 Unit Cost: EITHER $330 OR $333
Working [1]
Question 3f
GST – not included in the cost as GST is merely held by the business then passed onto the ATO at the end of the period. GST adds no value to the asset and is not used to bring it into its condition or location ready for sale.
Complementary Case – EITHER:
Not included due to immateriality as the relatively small cost of one case will not impact on decision making for the phones, although it can be logically allocated and is used to bring the phone into its condition for sale.
OR:
Included, as the cost can be logically allocated to individual units and is used bringing the phone into its condition ready for sale.
Question 3g
Accounting principle: Reporting period. [1]
Reporting period ensures expenses reflect what has been incurred and revenues what has been earned so profit can be accurately calculated.
If all units are sold, the effect on net profit will be the same as the entire cost will have been incurred. [2] If not all units sell, recording the import costs as product costs ensure only the expense that has been incurred is deducted from profit. [1]
Question 4a
$ $
Revenue
Cash Sales 218,500
Credit Sales 327,750 546,250
Less Cost of Sales 230,000
GROSS PROFIT 316,250
Less Stock loss 5,462.50
ADJUSTED GROSS PROFIT 310,787.50
Less other expenses
Bad Debts 4,400 Depreciation of Equipment 18,000 Advertising Expense 32,000 Rent Expense 154,250 208,650 NET PROFIT 102,137.50 Cash sales [1] Credit sales [1]
Cost of sales + stock loss [1] Bad debts and totals [1] Depreciation of equipment [1] Advertising expense [1] Rent expense [1] Question 4b
Financing activities are any cash flows which change the financial structure of the firm, for example a capital contribution.
Question 4c
Question 4d
Question 5a
Accrual accounting is a system that recognizes transactions when they occur, not necessarily when cash is received or paid. As such credit transactions are recognized and recorded and reported. Revenues earned are matched against expenses incurred in order to gain an accurate net profit for a reporting period.
Recognising transactions when they occur [1] Recording and reporting credit transactions [1] Question 5b
Date Details Debit Credit Debit Credit
30th June Stock Loss 400 Stock Control 400 Discount Expense 300 GST Clearing 30 Freight In 330
Depreciation of Delivery Van 2,600
Acc. Dep of Delivery Van 2,600
Interest Expense 2,250
Accrued Interest Expense 2,250
Rent Expense 8,000
Prepaid Rent Expense 8,000
Each correct adjustment entry [1]
Question 5c
General Ledger Subsidiary Ledger
Date Details Debit Credit Debit Credit
30th June Stock Loss 400
Cost of Sales 140,000
Discount Expense 200
Freight In 2,330
Freight Out 2,500
Rent Expense 8,000
Depreciation of Delivery Van 2,600
Interest Expense 2,250
Wages Expense 66,000
Profit and Loss Summary 224,280 Stock loss and cost of sales [1]
Freight out, wages expense and total [1] Discount expense and freight in [1] Rent expense [1]
Interest expense [1] Van depreciation [1] Question 5d
An expense is the outflow of economic benefits from the entity in the form of a reduction in assets (or an increase in liabilities) [1]
which causes a reduction in Owner’s Equity. [1]
Discount expense meets this definition as it is a reduction in assets (debtors) which reduces Owner’s Equity through discount expense as less is received from debtors. [1]
Question 5e
Accounting Principle: Reporting period – this involves dividing the business’s life into reporting periods to compare revenues earned against expenses incurred within the period to determine an accurate profit figure. [1]
Revenue and expense accounts need to be closed off to reset them to zero in anticipation of the next reporting period. [1]
Question 6
Profit and Loss Summary
Date Cross-reference Amount Date Cross-reference Amount 30th June Expense Accounts $78,900 30th June Revenue Accounts $51,400 Capital $27,500 $78,900 $78,900
Revenue credit, totals and date [1] Expense debit [1]
Question 7a
Cash Payments Journal Date
January
Details Chq. No.
Bank Wages Stock Control Sundries GST 10th Wages 12 27,000 27,000 Accrued Wages 12 10,800 10,800 Each entry [1] Question 7b Name of ledger account
Increase/Decrease/No Effect Amount
Assets Bank Decrease 37,800
Liabilities Accrued Wages Decrease 10,800
Owner's Equity
Wages expense Decrease 27,000
Question 8a
Hold less stock on hand. Purchase more expensive stock without altering sales prices. Increase advertising.
[1] for each measure, 2 needed. Question 8b
Reducing the stock turnover merely means holding on average less stock on hand or purchasing more expensive stock. An improvement can indicate an increase in sales, as less stock is on hand due to its sale. Similarly les stock on hand can improve profit due to decreased stock losses or write downs. However a decrease in Stock Turnover may be prompted by increasing cost of sales expense which detracts from gross profit. Therefore the owner must consider other indicators to determine an increase in profit.
Each point considered [1] Question 8c
Positive impact: A lower stock turnover indicates stock is being converted into sales faster, thus sales may have increased.
Negative impact: Due to less stock on hand the business may lose discounts on bulk stock purchases, or may lose sales due to less stock variety on hand. May not have enough stock on hand to fulfill consumer demand.
Each impact [1] Question 8d
Positive impact: As the business is taking longer to repay creditors, the cash on hand can be used for a longer period of time by the business to generate profit.
Negative impact: Taking too long to repay creditors can reduce the business’s credit rating, which may impact on future credit purchases. May also result in late fees for overdue accounts.
