Subject 1 - Suggested solution

1. Events 9 and 11 above are not accounting events and should not being recognized
in the financial statements.
In the case of 12 they should distinguish between the amount of the long term debt
that is payable within the next accounting period, i.e. 3,000, and the amount that is
payable after the end of the next accounting period, i.e. 4,000 + 3,300 = 7,300. The
first amount should be included in the current liabilities and the other in the long term
liabilities.
Calculation of Cost of goods sold
Merchandise opening balance
(+) Purchase of merchandise

5,000
10,000

(-)Merchandise closing balance

15,000
3,000

Cost of goods sold

12,000

MGC
Income statement for the period ended December 31, 2013
Sales
40,000
Cost of goods sold
(12,000)
Gross Profit
28,000
Expenses:
Rent expenses
3,000
Depreciation expenses
2,000
Wages
3,000
Utilities expenses
1,000
Advertising expenses
2,000
Other operational
Expenses
1,200
(12,200)
Income from operations
15,800
Finance income
Interest revenues
Finance expenses
Interest expenses
Losses from the sale
Of securities

1,000
650
200

(850)

Other expenses
Losses from the
Destruction of office equipment
Profit before income tax

(500)
15,450

Income tax expense (15,450 26 %)

Net profits

(4,017)
11,433

Book value of Buildings as at 31/12/2013

Acquisition cost
(-) Accumulated depreciation 31/12/2012
(-) Depreciation expense 2013

Book value of Office equipment as at 31/12/2013

Acquisition cost
(-) Accumulated depreciation 31/12/2012
(-) Depreciation expense 2013
Equity as at 31/12/2013:
Share capital
Opening balance
(+) Issuance of ordinary shares (5.000X1)
Paid-in capital in Excess of Par [5,000X (2-1)]
Retained earnings
Opening balance
(-) Dividends
(+) Net profit of 2013

70,000
(19,000)
(1,000)
50,000

15,000
(9,000)
(1,000)
5,000
70,000
5,000
75,000
5,000
25,000
(7,450)
11,433
28,983

Reserves had not changed during 2013

MGC
Balance sheet as at December 31, 2013
ASSETS
Fixed assets
Tangible assets
Buildings
70,000
Accumulated-depreciation Buildings
(20,000) 50,000
Office equipment
15,000
Accumulated-depreciation office equipment (10,000) 5,000
5,000
Investment in associates
Total fixed assets (a)
Current assets
Inventories
Merchandise
Receivables
Accounts receivable
Trading portfolio

55,000
5,000
60,000

3,000

3,000

5,000

5,000

Trading securities
Cash and cash equivalents
Cash
Bank deposits
Total current assets (b)

5,000
60,000
10,000

Total Assets (a + b)
75,000
5,000
10,000
28,983

Liabilities
Long term liabilities
Long term bank loan
Total long term liabilities

7,300

Total liabilities and equity (a+b)

70,000
83,000
143,000

Equity
Share capital
Paid-in capital in Excess of Par
Reserves
Retained earnings
Total equity (a)

Short term liabilities

Trade creditors
Notes payable
Current portion of long-term debt
Other accounts payable
Tax payable
Total short term liabilities
Total Liabilities (b)

5,000

7,000
1,500
3,000
1,200
4,017

118,983
118,983

7,300
7,300

16,717
16,717
24,017
143,000

2. According to Financial Accounting Standards Board (FASB) assets are probable

future economic benefits obtained or controlled by a particular entity as a result of
past transactions or events. Similarly, according to International Accounting
Standards Board (IASB) assets are economic resources controlled by the entity,
which are expected to produce future economic benefits. In both cases it is
fundamental that a firm has legally enforceable rights upon the economic benefits
relating to a particular item of asset. These rights can be obtained by the ownership of
the item. Yet, in determining whether an item can be classified as an asset the right of
ownership is not essential. For instance, in the case of property held under a financial
(or capital) lease agreement, the leased property will be recognized as an asset of the
lessee and not of the lessor, although the latter has proprietary rights upon the leased
property. This happens because essentially all the benefits and risks usually related
with ownership are transferred, though the lease agreement, to the lessee. Thus, a
leased asset can be included in the balance sheet of the lessee firm although it is not
owned by it.
Proposed references:
-FASB, Statement of Financial Accounting Concepts No. 8 September 2010
- IASB, The Conceptual Framework for Financial Reporting, 2010

- FASB, Statement of Financial Accounting Concepts No. 1, 1978

-IASB Framework for the Preparation and Presentation of Financial
Statements,(1989)
- Hendriksen, E.S. and Van Breda, M, Accounting Theory, 5th edition, 1992
-Dyckman, T.R. Davis, C. and Dukes, R.E, Intermediate Accounting, 5th edition, 2001
- W.T. Harrison Jr., C.T.Horngrern, C.W. Thomaw and T. Suwardy, Financial
Accounting, International Accounting Standards, 9th edition, 2014
-D.E. Kieso, J.J. Weygandt and T.D.Warfield, Intermediate Accounting, Vol. 1, IFRS
edition, 2011.
-Pratt, J., Financial Accounting in An Economic Context, 8th edition, 2011.

Subject 2 - Suggested solution

1.1 Units of production method
Equation: (Acquisition cost salvage value)/ estimated productive output in units
Acquisition cost includes: the acquisition price, i.e. 30,000 and all the costs that
incurred to bring the asset to its intended use. Thus, installation costs and repairs
(1,500+1,500) are included in the cost of the equipment. These costs are necessary in
order to bring the equipment to its intended use. Therefore the acquisition cost of the
assets is 33,000.The maintenance costs of 1,200 are not included in the acquisition
cost and they expense when they incurred.
Thus: (33,000- 2,500)/120,000 = 0.254 per unit of output
Depreciation expenses are:
2013
1,500 X 0.254 = 381
2014
7,000 X 0.254 = 1,778
2015
15,000 X 0.254 = 3,810
5,969
Book value as at 31/12/2015 = 33,000-5,969 = 27,031
1.2 Straight line method
Equation: (Acquisition cost salvage value)/ estimated useful life in years
Thus: Depreciable amount = 33,000-2,500 = 30,500
Depreciation expense for a twelve-month period: 30.500/12= 2,542
Depreciation expense for 2013:
2,542 X 5/12 = 1,059
Depreciation expense for 2014:
2,542 X 7/12 = 1,483
2,542 X 5/12 = 1,059
Depreciation expense for 2015:
2,542 X 7/12 = 1,483
2,542 X 5/12 = 1,059
Accumulated depreciation as at 31/12/2015
Alternatively:
Depreciation expense for 2013:
2,542 X 5/12 = 1,059

1,059
2,542
2,542
6,143

1,059

Depreciation expense for 2014:

2,542 X 121/12 =
Depreciation expense for 2015:
2,542 X 12/12 =
Accumulated depreciation as at 31/12/2015

2,542
2,542
6,143

Therefore book value as at 31/12/2015 = 33,000-6,143 =26,857

1.3 Double-declining-Balance method
Depreciation rate: (1/12) X 2 = 17 %
-Residual value is not subtracted from cost when computing depreciation
- The depreciation rate is applied to declining balance rather than to constant
depreciable cost.
Thus:
Depreciation expense for 2013:
33,000 X 17 %X 5/12 =
(1%)
Depreciation expense for 2014:
33,000 X 17 % X 7/12 =
(33,000- 2,337-3,272) X 17 % X 5/12=
(2%)
Depreciation expense for 2014:
(33,000- 2,337-3,272) X 17 % X 7/12=
(33,000- 2,337-3,272-1,940- 2,716) X 17 % X 5/12=

2,337

2,337

3,272
1,940

5,212

2,716
1,610

4,326(2%)
11,875

Therefore book value as at 31/12/2015 = 33,000-12,519 =21,125

Alternatively :
1/8/2013-1/8/2014
33,000 X 17 %=
1/8/2014-1/8/2015
(33,000-5,610) X 17 %=
1/8/2015 -31/12/2015
(33,000-5,610-4,656) X 17 % X 5/12 =

5,610
4,656

1,610
11,875
Therefore book value as at 31/12/2015 = 33,000-11,875 =21,125
Note: the fact that the actual useful life is not equal to the estimated one does not
affect the calculations in period 2013-2015, since the change occurred as a
consequence of an unanticipated event that took place in 2017.
2. For income-tax purposes most firms adopt an accelerated method of depreciation,
such as double-declining method, because it results in higher depreciation charges in
the early years of the assets useful life. Thus, double-declining method had a
negative impact upon taxable income and as a consequence minimizes tax liabilities
in the early years of assets useful life. This has a positive impact upon firms cash
flows at the earliest possible time.

Subject 3 Solution
a. Trial Balance and Share Capital Calculation
Notes receivable
Equipment
Rent expense
Beginning Invent. Merchandise
Cash on hand
Purchases of Merchandise
Sight deposits
Accounts receivable

20,000
250,000
80,000
60,000
125,000
100,000
90,000
130.000

Interest income
Accounts payable
Notes payable
Sales of Merchandise
Depreciated equipment
Share Capital

855,000

2,000
120,000
48,000
280,000
30,000
375,000

855,000

b. Journal entries
1 (4/12/2013)
rent expenses

16,000
Cash

16,000
2 (6/12/2013)

accounts payable
interest expenses

20,000
500
cash
notes payable

15,000
5,500

3 (7/12/2013)
sight deposits

12,000
cash

12,000
4 (8/12/2013)

cash

11,000
notes receivable

11,000

5 (15/12/2013)
Purchase of merchandise

30,000
cash
accounts payable
notes payable

10,000
10,000
10,000

6 (18/12/2013)
Cash

28,000
accounts receivable

28,000

7 (31/12/2013)
accounts receivable

500
interest income

500

8 (31/12/2013)
depreciation

30,000
depreciated equipment

30,000

9a (31/12/2013)
Merchandise

190,000
Purchases of Merchandise
beginning inv. Merchandise
9b

Cost of goods sold

130,000
60,000
110,000

Merchandise
TOTAL
c. Ledger

448,000

Notes receivable
20,000
11,000

Equipment

Accounts payable
120,000
20,000
10,000 5
Notes payable
48,000
5,500 2
10,000 5

250,000

Beginning Invent. Merchandise

60,000
60,000 9a

4
6

Cash on hand
125,000
11,000
28,000

110,000
448.000

16,000
15,000
12,000
10,000

1
2
3
5

Purchases of Merchandise
100,000
30,000
130,000 9a

Sales of Merchandise
280,000
Depreciated equipment
30,000
30,000 8

Share Capital
375,000

Sight deposits
90,000
12,000

Accounts receivable
130,000
28,000
500

Rent expense
80,000
16,000

Interest expense
500

depreciation expense
30,000

9a

Merchandise inventory
190,000 110,000

9b

Cost of goods sold

110,000

Interest income
2,000
500 7

9b

d. Journal entry & ledger post no. 9

e. Equity Capital
cogs
Rent expense
interest expense
depreciation expense
Profit

110,000 Sales of Merchandise

96,000 Interest income
500
30,000
236,500
46,000
282,500

280,000
2,500

282,500
282,500

Equity= Share Capital + Profit = 375,000 + 46,000 = 421,000

Subject 4 - Solution
1. - Answer: Management is primarily responsible for the content of their companys
financial reporting. The external auditors opinion reports on the fairness of the
financial statements while ensuring that they represent what they claim to and
conform to GAAP.

2. - Answer: Net income on the income statement ensues from the application of the
accrual basis of accounting; revenues are reported when earned and expenses incurred
are matched to those earned revenues. On the other hand, firms cash balance is
exclusively determined by cash received or disbursed.
3. - Answer:
A. Net income from the income statement appears in the statement of stockholders'
equity as an increase to retained earnings. A net loss decreases retained earnings.
B. The ending balance for contributed capital and retained earnings appear on the
balance sheet in the stockholders' equity section.
4. -Answer:
Error 1: A company failed to adjust the prepaid insurance account for insurance which
expired during the period.
Revenues __C___
Expenses __B___
Net income _A____
Assets __A___
Liabilities _C____
Stockholders equity __A___
Error 2: A company failed to record depreciation expense at year-end.
Revenues __C___
Expenses __B___
Net income _A____
Assets __A___
Liabilities __C___
Stockholders equity __A___
Error 3: A company did not adjust the unearned revenue account for revenue earned
during the year.
Revenues __B___
Expenses __C___
Net income _B____
Assets __C___
Liabilities __A___
Stockholders equity __B___