Indicative Exam

FACULTY OF BUSINESS

INDICATIVE EXAMINATION

ACC110 ACCOUNTING 2
SUBJECT CONVENOR:
DAY & DATE: TIME:
WRITING TIME: Three (3) hours READING TIME: Ten (10) minutes
MATERIALS SUPPLIED BY UNIVERSITY: 5 x 6 page answer booklets
General Purpose Answer Sheet
MATERIALS PERMITTED IN EXAMINATION: Battery operated calculator (must be no printer
on calculator)
2B Pencil/Eraser
NUMBER OF QUESTIONS: 50 multiple choice questions as follows:
Part A: 50 questions (1 mark each)
Part B: 5 questions (10 marks each)
INSTRUCTIONS TO CANDIDATES:
1. Enter your name and student number and sign in the space provided at the bottom of
this page and complete relevant details on the General Purpose Answer Sheet.
2. No written material, reference books or notes will be permitted into the examination
room.
3. Candidates are to attempt all questions.
4. All questions in Part A are to be answered on the General Purpose Answer Sheet.
Questions for Part B must be answered in the Answer Booklets provided. Answer each
question in a separate answer booklet.
5. The General Purpose Answer Sheet must be completed in 2B pencil. The lettered box
corresponding to the most correct answers must be filled in completely. To change an
answer erase completely and remark.
6. Candidates are advised to show all workings in Part B clearly labelling them as such.
7. Total marks for this paper equal 100.
This examination is worth 60% of the final assessment.

INSTRUCTIONS TO INVIGILATORS:
The examination paper must not be retained by the candidate.

STUDENT NAME: STUDENT NO:

STUDENT SIGNATURE:

PART A – MULTIPLE CHOICE

This part consists of fifty multiple choice questions. All questions must be attempted.

1. All amounts paid to acquire a non-current asset and to get it ready for its intended use
are referred to as:
 A. capital expenditures
B. salvage expenditures
C. the cost of an asset
D. revenue expenditures
E. none of the above.

2. Patents and copyrights are examples of:

A. current assets
B. property, plant and equipment
C. intangible assets
D. tangible assets
E. none of the above.

3. Two hundred hectares of land are purchased for $120,000. Additional costs include
$5,000 agent’s commission, $10,000 for removal of an old building, $6,000 for paving,
and an $800 survey fee. What is the cost of the land?

A. $141,800
B. $141,000
C. $135,000
D. $135,800
E. none of the above.

4. Jackson Constructions paid $42,000 for equipment with a fair market value of $46,000.
Jackson Constructions will record equipment at:

A. $42,000
B. $46,000
C. either $42,000 or $46,000
D. $44,000
E. none of the above.

5. Cycle World made a lump-sum purchase of land, buildings, and equipment for
$630,000. The estimated market values for the items are respectively, $210,000,
$322,000, and $168,000. Cycle World should debit the equipment account for:

A. $289,800
B. $189,000
C. $151,200
D. $168,000
E. none of the above.

6. If a capital expenditure is mistakenly recorded as a revenue expenditure, the effect is to:

A. understate net profit, owner’s equity, and assets

B. overstate net profit and owner’s equity, and understate assets
C. understate net profit and owner’s equity, and overstate assets
D. overstate net profit, owner’s equity, and assets
E. none of the above.

7. The process of allocating a non-current asset’s cost to expense over the period the asset
is used is called:
 A. amortisation
B. depreciation
C. depletion
D. direct write-off
E. none of the above.

8. Which depreciation method generally results in the greatest depreciation expense in the
first full year of an asset’s life?

A. straight-line
B. units-of-production
C. reducing-balance
D. either straight-line or reducing-balance
E. none of the above.

9. On 1 January 20X5, Bark Manufacturing purchased a machine for $27,500, and expects
to use the machine for a total of 32,000 hours over the next four years. Bark set the
residual value on the machine at $3,500. Bark used the machine for 6,000 hours in
20X5 and 7,200 hours in 20X6.

What is the depreciation expense for 20X5 if Bark uses reducing-balance depreciation
(at 1.5 times the straight-line rate)?

A. $9,000
B. $10,312.50
C. $6,875
D. $6,000
E. none of the above.

10. Which of the following statements is true?

A. Accumulated depreciation is that portion of an asset’s cost that has already been
recorded as an expense.
B. Depreciation is a process of valuation.
C. Depreciation represents the cash a business has set aside to replace assets as they
become fully depreciated.
D. Accumulated depreciation is classified as a liability account on the balance sheet.
E. none of the above.

11. On 1 January 20X5, Homes Real Estate purchased a $45,000 vehicle to chauffeur
clients to prospective homes. Homes plans on driving the vehicle for five years or
100,000 miles. Expected residual value is $10,000.

Homes Real Estate drove the vehicle 25,000 miles in 20X7. The depreciation expense
for 20X7 using the units-of-production/use method is:

A. $6,480
B. $8,750
C. $6,200
D. $2,880
E. none of the above.

12. Ronnie’s Wings acquired equipment on 1 January 20X3, for $300,000. The equipment
had an estimated useful life of 10 years and an estimated salvage value of $25,000. On
 1 January 20X6, Ronnie’s Wings revised the total useful life of the equipment to eight
years. Calculate depreciation expense for the year ended 31 December 20X6, if
Ronnie’s Wings uses straight-line depreciation.

A. $43,500
B. $38,500
C. $60,000
D. $27,500
E. none of the above.

13. June Industries recently sold some used furniture for $3,800 cash. The furniture cost
$19,600 and had accumulated depreciation up to the date of sale totalling $17,300. The
journal entry to record the sale of the furniture is:

A. Cash at Bank 3,800

Accum. Depn.-Furniture 17,300
Furniture
19,600
Gain on Sale of Furniture 1,500

B. Cash at Bank 3,800

Furniture
3,800

C. Cash at Bank 3,800

Gain on Sale of Furniture 3,800

D. Cash at Bank 3,800

Accum Depn-Furniture 15,800
Furniture
19,600
E. none of the above.

14. Goodwill is equal to the excess of the cost of an acquired business over the sum of the:

A. carrying amount of its net assets

B. carrying amount of its assets
C. fair value of its net assets
D. fair value of its assets
E. none of the above.

15. A cost whose total amount changes in direct proportion to a change in volume is a(n):

A. fixed cost
B. variable cost
C. mixed cost
D. irrelevant cost
E. none of the above.

16. As production increases within the relevant range, fixed costs per unit:

A. stay the same

B. increase
C. decrease
 D. could increase or decrease depending on the volume level of activity
E. none of the above.

17. Renting a car and paying $15 per day plus $.03 per mile driven is an example of a:

A. fixed cost
B. mixed cost
C. variable cost
D. conversion cost
E. none of the above.

18. Cost of goods sold on a conventional profit and loss statement (Statement of Financial
Performance) includes:

A. variable manufacturing costs only

B. fixed manufacturing costs only
C. marketing costs only
D. fixed and variable manufacturing costs
E. none of the above.

19. Contribution margin is equal to:

A. net profit plus fixed expenses

B. gross profit
C. fixed expenses less variable expenses
D. fixed expenses plus variable expenses
E. none of the above.

Use the following information to answer questions 20, 21 and 22.

Tedder Limited gathered the following information for the year ended 31
December 20X8

Fixed costs:
Manufacturing $165,000
Marketing 52,000
Administrative 24,000
Variable costs:
Manufacturing $113,000
Marketing 39,000
Administrative 48,000

During the year, Tedder produced and sold 75,000 units of product at a sale
price of $6.50 per unit.

20. The contribution margin is:

A. $287,500
B. $209,500
C. $324,500
D. $122,500
E. none of the above.

21. The gross profit is:

 A. $122,500
B. $287,500
C. $209,500
D. $324,500
E. none of the above.

22. The net profit (loss) is:

A. $(28,500)
B. $46,500
C. $94,500
D. $118,500
E. none of the above.

Use the following information to answer Questions 23 and 24.

Total fixed costs $10,000

Sale price per unit $20
Variable costs per unit $15

23. If sales revenue per unit increases to $22 and 10,000 units are sold, what is the
contribution margin?

A. $ 70,000
B. $ 60,000
C. $220,000
D. $ 80,000
E. none of the above.

24. If sales revenue per unit decreases to $18 and 15,000 units are sold, what is the net
profit or loss?

A. $(20,000)
B. $35,000
C. $65,000
D. $45,000
E. none of the above.

25. Hernandez Ltd. gathered the following information:

Total fixed expenses $324,800

Sale price per unit $115
Variable expenses per unit $87

The contribution margin ratio is:

A. 32.2%
B. 24.3%
C. 31.1%
D. 75.7%
E. none of the above.

26. If the sale price per unit is $32, total fixed expenses are $45,000, and the break-even
sales in dollars is $180,000, the variable expense per unit is:
 A. $24.00
B. $4.22
C. $8.00
D. $4.00
E. none of the above.

27. Roberts Limited management has budgeted the following amounts for its next
financial year:

Total fixed expenses $832,500

Sale price per unit $40
Variable expenses per unit $25

If Roberts Limited spends an additional $30,000 on advertising, sales volume should

increase by 2,500 units. What effect will this have on net profit?

A. increase of $7,500
B. decrease of $62,500
C. increase of $70,000
D. cannot be determined from the information given
E. none of the above.

28. Lorraine Limited currently sells its products for $25 per unit. Management is
contemplating a 20% increase in sale price for the next year. Variable costs are
currently 30% of sales revenue and are not expected to change next year. Fixed
expenses are $150,000.

If fixed costs were to decrease 10% during the current year, contribution margin
would:

A. increase 10%
B. decrease 10%
C. remain the same
D. impossible to determine with the given data
E. none of the above.

29. On a CVP graph, the horizontal line intersecting the dollar axis at the level of total
cost represents the:

A. total costs
B. total fixed costs
C. total variable costs
D. break-even point
E. none of the above.

30. Gould Enterprises sells computer disks for $1.50 per disk. Unit variable expenses total
$.90. The break-even sales in units is 3,000 and budgeted sales in units is 4,300. The
margin of safety in dollars is:

A. $1,950
B. $780
C. $4,500
D. $2,580
E. none of the above.
31. Management accounting:

A. focuses on the past

B. is not restricted by accounting standards
C. is used by creditors and investors
D. is concerned with adequacy of disclosure
E. none of the above.

32. A plant manager’s salary may be referred to as:

A. a direct cost
B. an indirect cost
C. either a direct cost or an indirect cost since management accounting is not
restricted by accounting standards
D. a variable cost
E. none of the above.

33. Product costs:

A. need not conform to accounting standards

B. include only the costs of direct materials and direct labour used to produce a
product
C. include the costs of direct materials, direct labour, and manufacturing overhead
used to produce a product
D. both A. and B. are correct
E. none of the above.

34. An example of a product cost is:

A. advertising expense
B. depreciation on office equipment
C. indirect labour
D. research costs
E. none of the above.

Use the following information to answer Question 35 and 36.

Windsor Ltd., reports production costs for 20X2 as follows:

Direct materials used $263,000

Direct labour incurred 342,000
Manufacturing overhead incurred 128,000

35. Windsor Ltd’s prime costs for 20X2 amount to:

A. $470,000
B. $391,000
C. $605,000
D. $733,000
E. none of the above.

36. Windsor Ltd’s conversion costs for 20X2 amount to:

A. $733,000
 B. $391,000
C. $605,000
D. $470,000
E. none of the above.

37. Cost of goods sold for a manufacturer equals cost of goods manufactured plus:

A. beginning work in process inventory less ending work in process inventory

B. ending work in process inventory less beginning work in process inventory
C. beginning finished goods inventory less ending finished goods inventory
D. ending finished goods inventory less beginning finished goods inventory
E. none of the above.

Use the following information to answer Questions 38 and 39.

Lakeside Limited reports the following data for 20X3, its first year of operations

Cost of goods manufactured $420,000

Work in process inventory, 31 Dec. 20X3 120,000
Direct materials used 110,000
Manufacturing overhead incurred 150,000
Finished goods inventory, 31 Dec. 20X3 60,000

38. What are the total manufacturing costs to account for by Lakeside Limited for 20X3?

A. $160,000
B. $190,000
C. $540,000
D. $300,000
E. none of the above.

39. What is cost of goods sold for Lakeside Limited for 20X3:

A. $240,000
B. $360,000
C. $340,000
D. $480,000
E. none of the above.

40. Bluebell Limited reports the following data for 20X3:

Cost of goods manufactured $69,300

Direct materials used 27,000
Direct labour incurred 30,000
Work in process inventory, 1 Jan. 20X3 9,000

Manufacturing overhead is 75% of the cost of direct labour. Work in process

inventory on 31 December 20X3, is:

A. $19,200
B. $10,200
C. $22,500
D. $13,500
E. none of the above.
41. Coaltowne Limited’s selected cost data for 20X5 is shown below:

Cost of goods manufactured $135,800

Work in process inventory, 1 Jan. 20X5 18,500
Work in process inventory, 31 Dec. 20X5 22,500
Direct materials used 14,700

What are the conversion costs incurred by Coaltowne Limited in 20X5?

A. $121,100
B. $117,100
C. $125,100
D. $150,500
E. none of the above.

42. Work in process inventory decreased $90 during 20X2. Total manufacturing costs
incurred in 20X2 amounted to $680. Cost of goods manufactured in 20X2 is:

A. $770
B. $590
C. $635
D. impossible to determine using the given data
E. none of the above.

43. If the cost of goods manufactured was $665,000, beginning and ending work in
process inventories were $187,000 and $205,000 respectively, direct labour was
$211,000 and manufacturing overhead costs were $298,000, then the direct materials
used were:

A. $156,000
B. $138,000
C. $174,000
D. $273,000
E. none of the above.

44. Expected future data that differ among alternative courses of action are referred to as:

A. irrelevant information
B. historical information
C. predictable information
D. relevant information
E. none of the above.

Use the following information to answer Questions 45, 46, 47 and 48.

Melvin Manufacturing is considering two alternative investment proposals

with the following data:

Proposal A Proposal B

Investment $620,000 $400,000

Useful life 8 years 8 years

 Estimated annual net cash inflows $130,000 $80,000

Residual value $60,000 $0

Depreciation method Straight-line Straight-line

Required rate of return 14% 10%

45. The payback period for Proposal A is:

A. 10.33 years
B. 4.77 years
C. 4.67 years
D. 8 years
E. none of the above.

46. The total present value of future cash inflows from Proposal B is:

A. $426,792
B. $266,750
C. $536,800
D. $640,000
E. none of the above.

47. The net present value of Proposal B is:

A. $136,800 positive
B. $26,792 positive
C. $133,250 negative
D. $0
E. none of the above.

48. Using the net present value model, which alternative should Melvin select, and why?

(1) Proposal B, because its net present value is $22,699 higher than the net present
value of Proposal A.
(2) Proposal B, because it is the only alternative with a positive net present value.
(3) Proposal A, because it is the only alternative with a positive net present value.

A. 1 only
B. 2 only
C. 3 only
D. both 1 and 2
E. none of the above.

49. Which of the following capital budgeting models considers both profitability and the
time value of money?

A. net present value

B. accounting rate of return
C. payback
D. both a and c are correct
E. none of the above.
50. Atlantic Limited is considering investing in specialized equipment costing $360,000.
The equipment has a useful life of 5 years and a residual value of $45,000.
Depreciation is calculated using the straight-line method. The expected net cash
inflows from the investment are:

Year 1 $160,000
Year 2 130,000
Year 3 100,000
Year 4 55,000
Year 5 40,000
$485,000

Atlantic Limited’s required rate of return is 14%.

Is the internal rate of return higher or lower than 14%?

A. higher
B. lower
C. equal to 14%
D. cannot be determined from the given data
E. none of the above.

PART B

This part consists of five (5) questions. All questions must be attempted. Answer each
question in a separate answer booklet.

QUESTION 1: (10 marks)

CVP Analysis

Blue Sky Pty Ltd produces climbing rope. The company incurs $100 000 of fixed expenses
per month. It sells the rope for $23 per metre, and it incurs variable expenses at the rate of $9
per metre.

Required:

(i) Prepare a contribution margin statement of financial performance, assuming that Blue
Sky sells 15 000 metres of rope in July.

(ii) CEO John Hand thinks Blue Sky could increase its sales to 25 000 metres of rope in
August if the company paid its sales force a commission of $1 per metre. What would
be Blue Sky’s net profit if it adopted the sales commission plan?

(iii) Should Blue Sky adopt the sales commission plan?

(iv) Why or why not?

QUESTION 2: (10 marks)

Capital Budgeting
Jones Company is considering buying a machine that would increase the company’s cash
receipts by $2,200 per year for five year. Operation of the machine would increase the
company’s cash payments by $100 in each of the first two years, $200 in the third and fourth
years and $300 in the fifth year. The machine costs $6,000 and would have a residual value
of $500 at the end of the fifth year.

Required:

(i) Assuming a 16% required rate of return, compute the net present value of the machine
investment being considered by Jones. (Present value table is attached to this
question paper.)

(ii) Should Jones Company make the investment? Why or why not?

QUESTION 3:(10 marks)

Non-current Assets – Depreciation

Jensen Company purchased drilling machine on 1 January 2000 for $60,000. The machine
had an expected life of 10 years and a residual value of $2,000.

Required:

(i) Compute the depreciation for 2000 and 2001 under each of the following methods: (a)
straight line and (b) reducing balance (use 15%).

(ii) Show how the company would report the book value of the machine on its 31
December 2001 balance sheet under each method.

QUESTION 4: 10 marks)

Short answer questions, answer all four (4) questions.

1. List five (5) of the more common environmental issues confronting business.
(2½ marks)

2. What are the advantages in using a computer spreadsheet to create a model for a
master budget?
(2½ marks)

3. What will be the affect on total variable costs and on unit variable costs if activity
increases by 20%.
(2½ marks)

4. Identify the major reasons why firms become multinational.

(2½ marks)

QUESTION 5: (10 marks)

Inventory Costing Method

A Best Yet Electronic Centre began December with 140 units of inventory that cost $75 each.
During December, the store made the following purchases:

Dec. 3 217 @ $79

12 95 @ 82
18 210 @ 83
24 248 @ 87

The store uses the periodic inventory system, and the physical count at 31 December
indicates that ending inventory consists of 229 units.

Required:

(i) Determine the ending inventory and cost-of-goods-sold amounts for the December
financial statements under the weighted-average, FIFO and LIFO cost methods. Round
weighted-average cost per unit to the nearest cent and all other amounts to the nearest
dollar.

(ii) What is the effect on profit of using LIFO versus FIFO?

ACC110 Multiple Choice Exam Solutions - Indicative Exam

Page 1

1. c
2. c
3. d
4. a
5. c
6. a
7. b
8. c
9. b
10. a
11. b
12. b
13. a
14. c
15. b
16. c
17. b
18. d
19. a
20. a
21. c
22. b
23. a
24. b
25. b
26. a
27. a
28. c
29. b
30. a
31. b
32. b
33. c
34. c
35. c
36. d
37. c
38. c
39. b
40. a
41. c
42. a
43. c
44. d
45. b
46. a
47. b
48. a
49. a
50. a
QUESTION 1: (10 marks)

(i)
Blue Sky Ltd
CVP Statement of Financial Performance for 31 July 2006

Sales (15,000 units x $23) $345,000

Variable expenses (15,000 units x $9) 135,000
Contribution margin 210,000
Fixed expenses 100,000
Net profit 110,000

(ii)

Net profit = Sales – Variable expenses – Fixed expenses

= (25,000 x $23) – (25,000 x $10) – 100,000
= $225,000

(iii)

Yes, you should introduce the changes.

(iv)

The profit is a great deal higher than with the original arrangement. Not only this, but the
contribution margin is much higher.
Question 2:.(10 marks)

Capital Budgeting

Machine will increase cash receipts by $2,200 per year for 5 years.

Costs will increase by $100 in year 1 and year 2, $200 in years 3 and 4 and $300 in year 5.

Impact on cash flows

Y1 2200 – 100 2100

Y2 2200 – 100 2100
Y3 2200 – 200 2000
Y4 2200 – 200 2000
Y5 2200 – 300 1900

Each of these cash flows should be discounted using the factors in the tables to derive their
present values:

Year Cash flow PV Factor (16%) PV $

Y1 2100 .8621 1810

Y2 2100 .7432 1561

Y3 2000 .6407 1281

Y4 2000 .5523 1105

Y5 1900 .4761 905

Y5 500* .4761 238

Total PV 6900

Less PV of investment 6000

NPV $900

As the NPV is positive ie the return is greater than 16% and if this was the only criteria on
which the investment decision was based then we would make the investment. Other
considerations may include its ranking of other investments, the riskiness of the venture and
the cashflows.

* Residual value in Year 5

Question 3: (10 marks)

Drilling machine Cost $60,000, residual value $2,000 and useful life of 10 years.

Straight line method:

Annual depreciation is (60,000 – 2000) / 10 years

$5,800 per year for 10 years.

Year 2000 $5,800

Year 2001 $5,800

Book value reported on balance sheet at 31 December 2001as

Drilling machine $60,000

Less accumulated depreciation (drilling machine) ( 11,600)
$48,400

Reducing balance method:

2000
Annual depreciation expense is $60,000 * .15 = $9,000

2001
Depreciation (60,000 – 9,000) * .15 = $7,650

Balance sheet as at 31 December 2001

Drilling machine $60,000

Less accumulated depreciation 16,650
Drilling Machine $43,350

QUESTION 4: (10 marks)

Solution as per notes and text

QUESTION 5: (10 marks)

(i) Weighted average unit cost:

Units Unit Cost Dollars

O/bal of inventory 140 75 10,500
217 79 17,143
95 82 7,790
210 83 17,430
248 87 21,576
Total cost of units for sale 910 $74,439

WAC/unit = 74,439/910 units

= $81.80/unit

Ending inventory = 229 units x $81.80

= $18,732.20

COGS = Total cost of units for sale – ending inventory

= $74,439 – 18,732.20
= $55,706.80
FIFO:

Total cost of goods for sale – as above

Ending inventory = 229 units x $87/unit

= $19,923

COGS = $74,439 -$19,923

= $54,516

LIFO:

Total cost of goods for sale – as above

Ending inventory = (140 units x $75) + (89 units x $79)

= $17,531

COGS = $74,439 – 17,531

= $56,908

(ii) In periods of changing prices, the difference between profit using FIFO costing
and profit using LIFO costing, can be significant. In a period of inflation (when
prices are rising), FIFO produces a higher value for ending inventory, and thus a
higher profit, as seen in this example. In periods of deflation, it is LIFO that
produces the higher ending inventory value, and therefore the higher profit.