MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

Written Assignment 1 Financial Accounting

Indicative Solutions
Subject 1 (25%)
A. Preparation of the balance sheet and the income statement
The impact of events 4, 5 and 6 upon financial statements is:
4. Recognition of a bad debt expense of 3,000 and an allowance for doubtful debts 3,000.
5. Where the depreciation for buildings is calculated as:
5,000

And the depreciation for office equipment is calculated as:

= 15,000
6. Recognition of a wage expense of 6,000 and a liability for wages payable 6,000.
The income statement is as follows:
Income statement for period ended December 31, 2015 (in )
Sales
Cost of goods sold
Gross profit
Expenses:
Wages (44,100 + 6,000)
Selling expenses
Other operational expenses
Interest expenses
Bad debts expense
Depreciations

792,000
472,500
319,500
50,100
123,000
42,100
6,000
3,000
20,000

Profit before income tax

Income tax expense (75,300 * 40%)

244,200
75,300
30,120
45,180

Where cost of goods sold is calculated as:

Merchandise opening balance
(+) Purchase of merchandise
(-) Merchandise closing balance

27,500
475,000
502,500
30,000
472,500

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

Moreover, the balance sheet is as follows:
Balance sheet as at December 31, 2015 (in )
ASSETS
EQUITY
Share capital
Fixed assets
Retained earnings
Tangible assets
Land
100,000
Total equity (a)
Buildings
200,000
Accumulated-depreciation buildings
47,000
153,000
LIABILITIES
Office equipment
Accumulated-depreciation office equipment

240,000
74,500

Total fixed assets (a)

Long term liabilities

Long term loan

210,000

418,500

Total long term liabilities

210,000

30,000

30,000

Receivables
Accounts receivable
Allowance for doubtful accounts

42,000
3,000

39,000

5,000

5,000

Total current assets (b)

205,380

165,500

Current assets
Inventories
Merchandise

Cash and cash equivalents

Cash

100,000
105,380

Short term liabilities

Suppliers
Interest payable
Wages payable

35,000
6,000
6,000

Tax payable

30,120

Total short term liabilities

Total liabilities (b)

77,120
287,120

Total liabilities and equity (a+b)

492,500

74,000

Total Assets (a+b)

492,500

Where the retained earnings were calculated as follows:

Opening balance
80,000
(+) Net profit of 2015
45,180
125,180
(-) Dividends

19,800
105,380

B. Questions Answers:
1. Financial statements should provide a true and fair view of the financial position and the financial
performance of a firm. As a consequence a firm should provide a fair presentation of the uncollectible
amount of its receivables. Besides the prudence principle requires the recognition of all probable losses
and expenditures as they are incurred. Consequently, this demand will be valued at the probable
realization value, namely the amount that the firm is likely to receive from B while the firm should
recognize a loss for the amount that is likely not to be collected.
2. Financial statements should provide a true and fair view of the financial position and the financial
performance of a firm. As a consequence a firm should provide a fair presentation of its liabilities.

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

Economic entities accrue an expense and related liability for a provision only if all of the following
conditions are met:
a.
b.

A firm has a legal obligation as a result of a past event.

It is possible that an outflow of resources embodying economic benefits will be required to
settle the obligation
c. A reliable estimate can be made of the amount of the obligation.
All three conditions are met in the particular case. Besides the prudence principle requires the
recognition of all probable losses as they are discovered and the expenditure as they are incurred.
Consequently, in 31/12/2015 the firm should consider the 50,000 (i.e. 50% of the 100,000) as a
liability in the balance sheet.
Proposed references:
-Revsine, L., Collins, D. and Johnson, B., 2005. Financial Reporting and Analysis. 3rd ed. New Jersey:
Pearson Educ., Inc.
-Dyckman, T.R., Davis, C. and Dukes, R.E, 2001. Intermediate Accounting. 5th edition.
- Harrison Jr., W.T., Horngrern, C.T., Thomas, C.W. and Suwardy, T., 2014. Financial Accounting,
International Accounting Standards. 9th edition.
- Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2011. Intermediate Accounting, Vol. 1, IFRS edition.

Subject 2 (25%)
A.

i)

FIFO Periodic

Units Available for Sale

60+70+65+40+80+40 = 355
Units Sold
95+105+25
= 225
Units in Ending Inventory 355 225
= 130
Cost of Goods Sold
Sales from Sept 1 Inventory
Sales from Sept 4 Purchase
Sales from Sept 12 Purchase
Sales from Sept 19 Purchase

Units
60
70
65
30
225

Unit Cost
15.00
17.50
19.50
21.50

Total
900
1,225
1,267.5
645
4,037.50

Ending Inventory
Sales from Sept 19 Purchase
Sales from Sept 24 Purchase
Sales from Sept 29 Purchase

Units
10
80
40
130

Unit Cost
21.50
17.50
22.00

Total
215
1,400
880
2,495

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

FIFO perpetual

DATE
Sept
01
04

Units

70

Purchases
Unit
Total
Cost
17.5

Units

1,225

08

60
35

12

65

19.50

1,267.50

19

40

21.50

860

22

24

35
65
5
80

17.50

25
40

22.00

15.00
17.50

17.50
19.50
21.50

900
612.50

612.50
1,267.50
107.5

1,400

27
29

Sales
Unit
Total
Cost

21.50

537.5

880

Units
60
60
70
35

Balance
Unit
Total
Cost
15.00
900
15.00
900
17.50
1,225
17.50
612.50

35
65
35
65
40
35

17.50
19.50
17.50
19.50
21.50
21.50

612.50
1,267,50
612,50
1,267,50
860
752.5

35
80
10
80
10
80
40

21.50
17.50
21.5
17.50
21.5
17.50
22.00

752.5
1,400
215
1,400
215
1,400
880

ii) LIFO Periodic

Units Available for Sale
60+70+65+40+80+40 = 355
Units Sold
95+105+25
= 225
Units in Ending Inventory 355 225
= 130
Cost of Goods Sold
Sales from Sept 29 Purchase
Sales from Sept 24 Purchase
Sales from Sept 19 Purchase
Sales from Sept 12 Purchase

Units
40
80
40
65
225

Unit Cost
22.00
17.50
21.50
19.50

Total
880
1,400
860
1,267.50
4,407.50

Ending Inventory
Sales from Sept 04 Purchase
Sales from Sept 01 Inventory

Units
70
60
130

Unit Cost
17.50
15.00

Total
1,225
900
2,125

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

LIFO Perpetual

DATE
Sept
01
04

Units

70

Purchases
Unit
Total
Cost
17.5

70
25

12

65

19.50

1,267.50

19

40

21.50

860

22

40
65
80

17.50

25
40

22.00

Total

17.50
15.00

21.5
19.5

1,225
375

860
1,267.5

1,400

27
29

Sales
Unit
Cost

1,225

08

24

Units

880

17.50

437.50

Units
60
60
70
35

Balance
Unit
Total
Cost
15.00
900
15.00
900
17.50
1,225
15.00
525

35
65
35
65
40
35

15.00
19.50
15.00
19.50
21.50
15.00

525
1,267.50
525
1,267.50
860
525

35
80
35
55
35
55
40

15.00
17.50
15.00
17.50
15.00
17.50
22.00

525
1,400
525
962.5
525
962.5
880

B. When inventory costs are expected to increase LIFO gives higher cash balance because it results in
lower income tax liability. Moreover, LIFO matches current costs with current revenue. Besides, it may
better reflect the usual pricing policy of a firm, which is to raise selling prices when replacement cost
increases despite the fact that goods are still on hand at the old lower price. The main arguments cited
against LIFO are:
1. There is no advantage to use LIFO when costs are rising.
2. The LIFO inventory on the balance sheet will be reported at old, out-of-date unit costs.
3. The LIFO does not precisely match replacement costs with revenues.
4. LIFO is subject to manipulation. A firm can affect its profits by changing its usual purchasing
patterns. In periods when prices rise rapidly, an entity can decrease its reported profit by
making large purchases at year-end or instead increase its reported profit by delaying
purchases.
5. The resultant cash flows do not correspond to the physical flow of the inventory.
6. It is complex and costly to apply.
When firms management is more concerned about reported profits, they are more likely to prefer
FIFO when inventory prices increase. Besides a firm may choose FIFO over LIFO for the following
reasons:
1. Firms can reduce their tax liabilities using FIFO when facing declining costs.
2. When inventory prices are rising the use of FIFO instead of LIFO increases inventory values.
Such an increase results in a more favorable presentation of firms financial condition and
performance.
3. Managements compensation plans may calculate bonuses using reported profits. Because
FIFO (vs. LIFO) increases reported income provided that the prices rise FIFO may
increase managers compensation and as a consequence motivate managers to choose FIFO.
4. A firm may choose FIFO in order to report higher profits in the belief that it will lead to
higher prices for firms stock.

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

Proposed references:
- Hendriksen, E.S. and Van Breda, M, Accounting Theory, 5th edition, 1992
-Dyckman, T.R. Davis, C. and Dukes, R.E, Intermediate Accounting, 5 th edition, 2001
- W.T. Harrison Jr., C.T.Horngrern, C.W. Thomas 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, 8 th edition, 2011.

Subject 3 (25%)
A.
-License. The license has an indefinite life. If no factors (legal, regulatory, contractual,
competitive, or other) limit the useful life of an intangible asset, a firm considers its life indefinite.
An indefinite life means that there is no foreseeable limit on the period of time over which the
intangible asset is expected to provide cash flows. A company does not amortize an intangible
asset with an indefinite life. ABC considers that there is no limit on the period of time over which
the license will generate economic benefits, while it can renew the license indefinitely.
Thus the license has an infinite life and it is not amortized. Its book value on December 31, 2016
is 120,000.
-Product-patent. On January 2, 2016 ABC determined that the product-patent has a shorter useful
life than originally used in establishing an amortization schedule. This is a change in estimate and
is accounted for prospectively. The remaining unamortized balance is written off over the new
estimate of useful life:
Net balance at January 2, 2016: (120,000-72,000*)
Remaining life of patent (divide by)
Amortization for 2016

48,000
2
24,000

*120,000/10 years = 12,000 X 6 years= 72,000

Thus the book value of the product-patent on December 31, 2016 is: 120,000- (72,000 +
24,000) = 24,000
-Process-patent. The research and development costs incurred until October 1, 2016 (i.e. 25,000)
will be expensed. Costs incurred after the economic viability of the process-patent has been
established would be capitalized. The acquisition cost of the processpatent is 5,000. The useful
life of the process-patent is 5 years. Companies should amortize the cost of a contractual or
technology related intangible asset over its legal life or its useful life whichever is shorter.
Therefore the book value of the process-patent on December 31, 2016 is determined as follows:
Amortization for 2016: 5,000/ 5 years = 1,000 3/12 = 250
Thus the book value of the process- patent on December 31, 2016 is:
5,000 - 250 = 4,750
-Trademark. The cost of the trademark is the 75% of 100,000 or 75,000. Although the firm
expects economic benefits over a 12 years period, the legal life of the trademark is 10 years.
Companies should amortize the cost of a contractual or technology related intangible asset over its
legal life or its useful life whichever is shorter. The fact that the renewal cost is considerable
means that the useful life of the trademark cannot be determined as indefinite. Thus, the book
value of the trademark on December 31, 2016 is determined as follows:
Amortization for 2016: 75,000/10 years = 7,500 8/12 = 5,000
Thus the book value of the trademark on December 31, 2016 is:
75,000 - 5,000 = 70,000

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

-Non-competition agreement. The cost of the agreement is the 25% of 100,000 or 25,000.
The agreement has a useful life of 6 years. Thus the book value of the agreement on December 31,
2016 is determined as follows:
Amortization for 2016: 25,000/6 years = 4,167 8/12 = 2,778
Thus the book value of the agreement on December 31, 2016 is:
25,000 - 2,778 = 22,222
-Goodwill.
Land
Buildings
Trademarks
Inventory
Accounts receivables
Cash

115,000
85,000
25,000
82,000
124,000
65,000
496,000

Less:
Long-term liabilities 177,000
Accounts payable
103,000

(280,000)

Fair value of net assets acquired

216,000
Less: purchase price
300,000
Goodwill (excess of cost over
net assets acquired)
84,000
The intangible assets section of balance sheet, December 31, 2016:

License
Product-patent (net value)
Process-patent (net value)
Trademarks (net value)
(70.000 + 25.000)
Non-competition agreement (net value)
Goodwill

120,000
24,000
4,750
95,000
22,222
84,000
349,972

B.
Suggested answer
Goodwill is the difference between the actual purchase price of an acquired firm and the estimated fair
market value of the identifiable net assets acquired. Acquiring firms are willing this premium
because they believe that the value to them owning the acquired firm exceeds the fair market value of
acquired firms individual net assets. Goodwill represents the expected value of future above-normal
financial performance. This expectation arises because favorable characteristics make it likely that the
firm will produce higher average earnings (e.g. superior management team, good labor relationships,
outstanding credit rating etc.).
Goodwill is recorded only when is purchased in the acquisition of another entity. An acquisition by
purchase is the only objective means of measuring the cost of goodwill. Internally generated goodwill
should not be capitalized since no objective transaction with outside parties takes place, and a great
deal of subjectivity may infiltrate in the relevant calculations. Both IASB and FASB provide that
goodwill should not be amortized but companies should adjust its carrying value only when goodwill is
impaired.

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

When the purchaser pays less than the fair value of the identifiable net assets, the acquiring firm has
made what is called a bargain purchase. This amount is often called negative goodwill. This amount is
recorded as a gain by the purchaser. Alternatively it can be classified as deferred credit and
systematically amortized to income over the period estimated to be benefited.
Proposed references:
- Hendriksen, E.S. and Van Breda, M, Accounting Theory, 5 th edition, 1992
-Dyckman, T.R. Davis, C. and Dukes, R.E, Intermediate Accounting, 5 th edition, 2001
- W.T. Harrison Jr., C.T.Horngrern, C.W. Thomas 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 4 (25%)
A. 1.
1
Wages expenses

300
Wages payable

300

2
Accounts Receivable

3,000
Revenues

3,000
3

Depreciation

400
Accumulated depreciation

400

4
Insurance expenses

160
Prepaid insurance

160

5
Bank Deposits

20
Interest revenues

20

6
Interest expenses

180
Notes payable/interest payable

180

7
Unearned revenue

230
Revenues

230

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

2.
The equity of as at 31 December, 2016, before the adjustment is:
Bank deposits

8,000

Prepaid insurance

800

Office equipment

5,000

Wages expenses

3,000

Accounts receivable

1,200
18,000

Accumulated depreciation, office equipment

2,500

Unearned revenues

6,000

Notes payable

3,000

Services Revenues

4,000

Equity

(15,500)
2,500

The result for the year 2016 is:

Revenues:

Expenses:

Sales

7,230

Interest revenues

20

wages

3,300

Depreciation

400

7,250

Insurance
Expenses

160

Interest
Expenses

180

(4,040)

Profit
Income tax: 3,210 X 20 %
Net profit

3,210
(642)
2,568

Equity at 31 December 2016, after adjustments is: 2,500 + 2,568 = 5,068

B.
Accounting assumes that an entity is a going concern. The entity expected not to liquidate but will
continue its operation for an indefinitely long period in the future. That is, it will stay in business for a
period of time sufficient long to carry out contemplated operations, contracts and commitments. The
continuity assumption provides a conceptual basis for many of the classifications used in financial
reporting. Assets are classified as long term or current on the basis of this assumption. In case that the
continuity assumption does not hold, the distinction between long term and current assets and liabilities
lacks significance. The going concern provides a theoretical justification of cost principal. If continuity
assumption does not apply, i.e. the entity is about to be liquidated, assets should be stated at their
liquidation value. Consequently, accounting would attempt to determine at all times the value of firms
9

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

resources to potential buyers. There is no need to measure firms assets at their cost. As a result,
depreciation and amortization of assets is not needed.
If an economic entity expects to be liquidated in the near future conventional accounting based on
continuity assumption. Such circumstances require the use of liquidation accounting.
Proposed references:
- Hendriksen, E.S. and Van Breda, M, Accounting Theory, 5 th edition, 1992
-Dyckman, T.R. Davis, C. and Dukes, R.E, Intermediate Accounting, 5 th edition, 2001
- W.T. Harrison Jr., C.T.Horngrern, C.W. Thomas 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, 8 th edition, 2011.
- R.N. Anthony, D.F. Hawkins, and K.A. Merchant, Accounting : Text and Cases, McGraw-Hill, 1999
- T.D.Warfield, D.E. Kieso, and, P.D. Kimmel, Accounting Principles, 5th edition, 1999.

Learning Outcomes (objectives)

(Subject 1)
Students should be able to prepare financial statements. In addition, they should exhibit a through
understanding of fundamental financial accounting principles, such as true and fair view and
conservatism principle.

(Subject 2)
Students should exhibit a thorough understanding of accounting for inventories. In particular, they
should be able to calculate cost of goods sold and closing inventory under various inventory cost-flow
methods. In addition, they should explain the advantages and the limitations of various inventory costflow methods

(Subject 3)

10

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION

Students should exhibit a thorough understanding of accounting for intangible assets. In particular, they
should be able to identify and measure intangible assets at their initial recognition. In addition they
should be able to measure intangible assets subsequently to their initial recognition.

(Subject 4)
Students should exhibit an understanding of the recording process. In addition, they should exhibit a
thorough understanding of the fundamental financial accounting principle of going concern.

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