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CMA DECEMBER, 2020 EXAMINATION BUSINESS LEVEL
SUBJECT: GE 01. FUNDAMENTALS OF FINANCIAL ACCOUNTING
Time Allocated: Three hours Total Marks: 100
Instructions to Candidates
You are required to answer ALL questions.
Answers should be properly structured, relevant and computations need to be shown.
You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or sub-questions).
ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking.
Start answering each question from a fresh sheet. Your answers should be clearly numbered with the sub-question number then ruled off, so that the markers know which sub-question you are answering.
No of questions No of sub-questions Marks allocation
8 Maximum 03 Question 1- 6 = 10 marks each
Question 7- 8 = 20 marks each
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You are advised to spend 18 minutes on Question 1- 6 (10 marks per each) and 36 minutes on Question 7- 8 (20 marks per each).
QUESTION 1
(a) “Accounting is the language of business.” Do you agree with the statement? Explain.
(b) What is the basic accounting problem created by the monetary unit assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?
(c) What is the definition of fair value? What is the fair value option? Explain how use of the fair value option reflects application of the fair value principle.
[Marks: (3+3+4) = 10]
QUESTION 2
(a) What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?
(b) At December 31, 2019, House Co. reported the following information on its balance sheet.
Accounts receivable $960,000 Less: Allowance for doubtful accounts 80,000
During 2020, the company had the following transactions related to receivables.
(1) Sales on account $3,700,000.
(2) Sales returns and allowances 50,000.
(3) Collections of accounts receivable 2,810,000.
(4) Write-off s of accounts receivable deemed uncollectible 90,000.
(5) Recovery of bad debts previously written off as uncollectible 29,000.
Required:
(i) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
(ii) Enter the January 1, 2020, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T-accounts), and determine the balances.
(iii) Prepare the journal entry to record bad debt expense for 2020, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
(iv) Compute the accounts receivable turnover for 2020 assuming the expected bad debt information provided in (c).
[Marks: (4+6) = 10]
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Page 3 of 6 QUESTION 3
(a) Walton Company sells televisions at an average price of Tk.9000 and also offers to each customer a separate 3-year warranty contract for Tk.900 that requires the company to perform periodic services and to replace defective parts. During 2015, the company sold 300 televisions and 270 warranty contracts for cash. It estimates the 3- year warranty costs as Tk.20 for parts and Tk.40 for labor, and accounts for warranties separately. Assume sales occurred on December 31, 2015, and straight-line recognition of warranty revenues occurs.
Required:
(i) Record any necessary journal entries in 2015.
(ii) What liability relative to these transactions would appear on the December 31, 2015, balance sheet and how would it be classified?
In 2016, Walton Company incurred actual costs relative to 2015 television warranty sales of Tk.2,000 for parts and Tk.4,000 for labor.
(iii) Record any necessary journal entries in 2016 relative to 2015 television warranties.
(iv) What amounts relative to the 2015 television warranties would appear on the December 31, 2016, balance sheet and how would they be classified?
(b) Under what conditions must an employer accrue a liability for the cost of compensated absences?
[Marks: (2+2+2+2)+2 = 10]
QUESTION 4
(a) “Detection of frauds and errors is not the objective of an independent financial audit.” Comment.
(b) “The statutory auditor should test internal controls before relying on the same.” Comment on this statement?
(c) Distinguish between ‘Errors of omission’ and ‘Errors of commission’.
[Marks: (3+3+4) = 10]
QUESTION 5
(a) Discuss Accounting Constraints- (i) Materiality; (ii) Cost benefit relationship.
(b) Show the differences between IAS and IFRS.
(c) Rabeya Supply Co. has the following transactions related to notes receivable during the last 2 months of 2020. The company does note make entries to accrue interest expenses at December 31.
Nov- 1 Loaned Tk. 30,000 cash to Luna Co. on a 12 months, 10% note.
Dec- 11 Sold goods to Ralph Inc. receiving a Tk. 6,750, 90 days 8% note.
16 Received a Tk. 4,000, 180 days 90% note in exchange for Masud's outstanding accounts receivable.
31 Accrued interest revenue on all notes receivable.
Instructions:
(i) Journalize the transactions for Rabeya Supply Co.
(ii) Record the collection of the Luna note at its maturity in 2021.
Marks: (2+3+5) = 10]
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Page 4 of 6 QUESTION 6
(a) Explain the purpose financial control.
(b) Discuss the first level of Conceptual Framework.
(c) Journalize the adjusting entry needed on 30 June 2020. the end of the current accounting period, for each of the following independent cases affecting Concord Construction:
(i) Concord Pays its employees each Thursday. The amount of salaries is Tk. 2,100 for a five-day work week (from Sunday to Thursday) and the daily salary amounts are equal. The last week of the year ended 30 June 2020, which was Wednesday.
(ii) Concord has lent some money. During the current year, the entity has earned accrued interest revenue of Tk. 750 that It will receive next year.
(iii) The beginning balance of supplies was Tk. 2,680. During the year the entity purchased supplies costing Tk. 6,180, and at 30 June 2020, the inventory of supplies on hand is Tk. 2,150.
(iv) Concord is servicing the air-conditioning system in a large building and the owner of the building paid Concord Tk. 12,900 as the annual service fee. Concord recorded this amount as unearned Service Revenue. Concord estimates that it has earned one quarter of the total fee during the current year.
[Marks: (3+3+4) = 10]
QUESTION 7
The comparative balance sheets for Hyder Incorporation show the following information.
Particulars December 31
2014
December 31 2013
Cash 38,500 13,000
Accounts receivable 12,250 10,000
Inventory 12,000 9,000
Investments 0 3,000
Buildings 0 29,750
Equipment 40,000 20,000
Patents 5,000 6,250
Total Assets 107,750 91,000
Allowance for doubtful accounts 3,000 4,500
Accumulated depreciation—equipment 2,000 4,500
Accumulated depreciation—building 0 6,000
Accounts payable 5,000 3,000
Dividends payable 0 5,000
Notes payable, short-term (nontrade) 3,000 4,000
Long-term notes payable 31,000 25,000
Common stock 43,000 33,000
Retained earnings 20,750 6,000
Total Liabilities and Equity 107,750 91,000
Additional data related to 2014 are as follows.
(1) Equipment that had cost Tk.11,000 and was 30% depreciated at time of disposal was sold for Tk.2,500.
(2) Tk.5,000 of the long-term note payable was paid by issuing common stock.
(3) Cash dividends paid were Tk.5,000.
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(4) On January 1, 2014, the building was completely destroyed by a flood. Insurance proceeds on the building were Tk.33,000 (net of Tk.4,000 taxes).
(5) Investments (available-for-sale) were sold at Tk.1,500 above their cost. The company has made similar sales and investments in the past.
(6) Cash was paid for the acquisition of equipment.
(7) A long-term note for Tk.16,000 was issued for the acquisition of equipment.
(8) Interest of Tk.2,000 and income taxes of Tk.5,000 were paid in cash.
Required:
(a) Use the indirect method to analyse the above information and prepare a statement of cash flows for Hyder.
(b) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of:
(i) A severely financially troubled firm?
(ii) A recently formed firm that is experiencing rapid growth?
[Marks: {14+(3+3)} = 20]
QUESTION 8
(a) Discuss the tools of financial statement analysis.
(b) The Trial Balance and other information of Russell Enterprise are given below:
Russell Enterprise Trial Balance December 31.2020
Account Title Debit Taka Credit Taka Cash
Prepaid rent Prepaid insurance office equipment
Accumulated depreciation office equipment Motor car
Accumulated depreciation Motor car Accounts receivable
Accounts payable
Unearned management fee Capital
General Reserve Repair expense Commission revenue Management fee revenue Salaries expense
Advertisement expense Gas and oil expenses Miscellaneous expenses Rates and Taxes
Stock of supplies Land
Building
Accumulated depreciation Building
1,00,000 30,000 8,000 40,000 80,000 60,000
5,000
40,000 10,000 8,000 6,000 6000 4000 1,40,000 2,00,000 7,37,000
8,000 16,000 50,000 24,000 3,07,000 1,20,000 1,50,000 50,000
12.000 7,37,000 TURN OVER
Page 6 of 6 Additional Information:
(i) Insurance expense-for 2020 Tk. 6,500.
(ii) Rent expanse for 2020 Tk. 24,000.
(iii) Depreciation: office equipment Tk. 4,000 Motor Car Tk. 8,000 and Building Tk. 6,000.
(iv) Salaries earned but not paid at December 31, 2020 Tk. 2,500.
(v) Stock of supplies at December, 31 2020 Tk. 1,500.
(vi) The unearned management fees were received and recorded in November 1, 2020.
This advance payment covered six months (up to April 2021) management of an apartment building,
(vii) Bad debts is estimated 5% of the accounts receivable of December 31, 2020.
Required:
(i) A Classified income statement for the year ended December 31, 2020 (ii) A Classified Balance sheet on December 31, 2020.
[Marks: (5+10+5) = 20]
*END OF QUESTION PAPER*
