NANYANG TECHNOLOGICAL UNIVERSITY

NANYANG BUSINESS SCHOOL

AB1102 - ACCOUNTING II
Semester 2, 2014/2015

Seminars 2 & 3:
(1) Qualitative Characteristic/Conceptual Framework
(2) Accounting Measurement System /Articulation of Financial Statements
(3) Presentation of Financial Statements

A)

Pre-seminar preparation

a)

Required readings: refer to course outline

b)

Be prepared for the discussion questions

B)

Discussion questions

(1) Qualitative Characteristic/Conceptual Framework

Q2
(2) Accounting Measurement System /Articulation of Financial Statements
Q1 (self-study)
(3) Presentation of Financial Statements
Q1

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(1) Qualitative Characteristic/Conceptual Framework

Question 1

Briefly describe the contents of the Conceptual Framework for Financial Reporting.
Question 2

For each independent situation below, discuss the relevant qualitative characteristics that
make financial information useful.

(a)

The book value of an office building is approaching its originally estimated salvage
value of $200,000. However, its current market value has been estimated at $1.2
million. The companys management would like to report the current value of the
building on the statement of financial position.

(b)

(c)

XYZ Co has used the First-In-First-Out (FIFO) inventory method for the past twenty
years. Although its main competitor uses the Weighted Average (WA) method of
accounting for inventories, both methods are equally popular with the other companies
in the industry. XYZ Co is contemplating a switch from FIFO to the WA method.
Prior to the issue of FRS 102, BBC Co was considering the disclosure of the cost of
employee stock options issued to-date in its financial statements. BBC Co believed that
such disclosure would provide useful information to the sophisticated financial
statement users but was concerned that other users might be more confused than ever
before.

Question 3

Discuss the benefits and limitations of the Conceptual Framework.

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(2) Accounting Measurement System /Articulation of Financial Statements

Question 1
Making a Decision as an Auditor: Effects of Errors on Income Statement and Balance Sheet
Parallel Pte Ltd engaged an inexperienced accountant to prepare its financial records during its 1st year of operations ended on 31 December
20x8. An independent Certified Public Accountant (CPA) examined the accounting records and discovered numerous errors. Assume that each
error is independent of the others.
Net Income
Assets
Liabilities
Owners equity
Independent Errors
2008
2009
2008
2009
2008
2009 2008
2009
(a) Depreciation expense of $3,000 for 2008 was not
recorded.
(b) Wages of $1,500 earned by employees during 2008
were not recorded or paid in 2008 but will be paid in
2009.
(c) Revenue of $3,500 earned during 2008 but not
collected or recorded until 2009.
(d) Insurance premium of $1,800 paid for year 2009 was
recorded as an expense in 2008.
(e) Cash of $9,000 collected from customer for services
to be rendered in 2009 but was recorded as revenue in
2008.
(f) On December 31, 2008, equipment costing $20,000
was purchased on credit but not recorded until payment
made on 28 January 2009.
Required:
(i) Analyze each error and indicate its effect on 20x8 and 20x9 income statement and balance sheet items if not corrected. Do not assume any
other errors. Use these codes to indicate the effect of each dollar amount: O = overstated, U = understated, and NE = no effect. Write an
explanation of your analysis of each transaction to support your response.
(ii) Prepare the necessary correcting journal entries to rectify the errors.

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(i)
Suggested solution:
Independent Errors
(a) Depreciation expense of $3,000 for 2008 was not
recorded.
(b) Wages of $1,500 earned by employees during 2008
were not recorded or paid in 2008 but will be paid in
2009.
(c) Revenue of $3,500 earned during 2008 but not
collected or recorded until 2009.
(d) Insurance premium of $1,800 paid for year 2009 was
recorded as an expense in 2008.
(e) Cash of $9,000 collected from customer for services
to be rendered in 2009 but was recorded as revenue in
2008.
(f) On December 31, 2008, equipment costing $20,000
was purchased on credit but not recorded until payment
made on 28 January 2009.

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Net Income
2008
2009
O
NE
$3,000
O
U
$1,500
$1,500

Assets
2008
O
$3,000
NE

U
$3,500
U
$1,800
O
$9,000

O
$3,500
O
$1,800
U
$9,000

U
$3,500
U
$1,800
NE

NE

NE

U
$20,000

2009
O
$3,000
NE

Liabilities
2008
2009
NE
NE
U
$1,500

NE

NE

NE

NE

NE

NE

NE

NE

U
$9,000

NE

NE

U
$20,000

NE

Owners equity
2008
2009
O
O
$3,000 $3,000
O
NE
$1,500
U
$3,500
U
$1,800
O
$9,000

NE

NE

NE

NE
NE

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Q1(ii)

(a)
(b)
( c)
(d)
(e)
(f)

Correcting journal entries

Date

Description

31 Dec 08

Depreciation expense
Accumulated depreciation

31 Dec 08
31 Dec 08
31 Dec 08
31 Dec 08
31 Dec 08

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Dr
$
3,000

Cr
$
3,000

Wages Expense
Wages Payable

1,500

Accounts Receivable
Revenue Earned

3,500

Prepaid Insurance
Insurance Expense

$1,800

Revenue Earned
Unearned revenue

9,000

Equipment
Other payable

20,000

1,500
3,500
$1,800
89,000
20,000

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Question 2
Lee Jia Service Repair Companys Salaries Payable Account balance stood at $3,000 and $7,000
as at 31 December 2003 and 31 December 2004 respectively. An interest-free loan of $2,000
was made on 1 September 2003 to one of its employees, settlement of which was to be made
equally over a period of 10 months by way of setting off the amount against his monthly salary
commencing 1 October 2003. A total of $45,000 cash was paid to its employees during the year
2004. Determine the amount of salaries expense that should be reported for the year ended
December 31, 2004.
Q1(c) of AA101 Sem 1 Exam 2004/2005
Key Ans: $50,400

Question 3
During the year ended December 31, 2004, Cliffort Cleaning Company collected a total of
$500,000 cash from its customers in relation to its cleaning services. Of the $500,000 received,
$110,000 related to services rendered and recorded in the prior year while $60,000 was collected
on 1st November 2004 for services to be rendered immediately over a 6-month period. Service
revenue of $30,000 was earned for contracts completed in December 2004 but was not collected
until 2005. Determine the amount of revenue that should be reported for the year ended
December 31, 2004.
adapted from Q1(b) of AA101 Sem 2 Exam 2003-2004
Key Ans: $380,000

Question 4
During the year ended December 31, 2004, Soo Namee Company performed services for which
customers paid or promised to pay $250,000. Of this amount, $220,000 had been collected at
year-end. During the year, Soo Namee recorded salaries expense of $50,000, of which 5% still
remained outstanding at year end. It incurred $40,000 for other expenses, of which had been
paid in January 2005. It also declared and paid a dividend of $20,000. What was Soo Namees
net income (net loss) for the year ended December 31, 2004?
Q1(b) of AA101 Sem 2 Exam 2004-2005
Key Ans: $160,000

Question 5
The accounting records of Pear Pte Ltd showed total assets and total liabilities of $60,000 and
$20,000, respectively, as at 31 March 2007. The year-end audit revealed that cash of $2,000,
collected from one of the customers in settlement of his outstanding balance, was erroneously
recorded as a debit to Advertising Expense account and a credit to Cash account.
(i)
(ii)

Prepare journal entries to correct the above error.

Determine the correct balances for each of the three elements in the accounting equation.
Q1(a) of Sem 2 Exam 2006-2007
Key answers: Assets = $62,000 ; Liabilities = $20,000; Stockholders equity = $42,000

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Question 6
TopDown Pte Ltd's list of adjusted account balances as at 31 March 2009 includes the following:
PPE, at cost
Accumulated depreciation PPE
Accumulated impairment loss - PPE
Accounts receivable (A/R)
Allowance for impairment of A/R
Accounts payable
Loan payable (due in 5 years)
Revenue
Cost of goods sold
Other expenses
Inventories (31 March 2009)
Bank overdraft
Sales returns & allowances
Collections on behalf of third parties
Other accruals

$114,000
10,000
$x
20,000
$2,000
16,000
5,000
250,000
170,000
60,000
25,000
4,000
1,000
$y
$3,000

As at 31 March 2009, TopDowns total liabilities stand at $35,000 and its total debt to equity
ratio is 1: 3. Determine the missing figures ($x and $y) in the table above.
Q1(a) of AA102 Sem 2 Exam 2008/2009
Key answers: $x= $7,000; $y = $7,000

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(3) Presentation of Financial Statements

Question 1
TED Ltd is a company incorporated in Singapore, and is engaged in the manufacture of
electronic components and electrical appliances. It is a partly owned subsidiary of XYZ Ltd
which is also incorporated in Singapore. The trial balance of TED Ltd as at 31 December 2012
is re-produced below.
$000
$000
Sales
365,000
Purchases of raw materials and consumables
268,750
Bank interest
1,150
Interest on debentures
6,325
Salaries and wages
18,055
Motor vehicle expenses
9,200
Fees audit
1,150
Utilities, repairs and maintenance
8,510
Rental expenses
1,035
Miscellaneous expenses
1,725
Income tax expense
5,750
Directors remuneration
1,150
Ordinary shares
24,500
Retained earnings, 1/1/12
40,250
Debentures
63,250
Bank overdraft
8,625
Provision for income tax
5,750
Trade payables
29,900
Cash in hand
4,600
Trade receivables
28,750
Inventories (FG and WIP), 1/1/12
43,125
Motor vehicles
20,700
Equipment
14,950
Freehold land (acquired 1/1/12)
57,500
Freehold buildings (acquired 1/1/12)
57,500
Accumulated depreciation equipment
3,450
- motor vehicles
9,200
549,925
549,925

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The following items (i) to (v) have not been taken into account in the amounts shown in the
above trial balance:
i.

Inventories at 31 December 2012 consist of:

Finished goods
Work-in-process

$22,875,000
4,000,000
$26,875,000

ii.

Depreciation is to be provided as follows:

- 2% on freehold buildings using straight-line method
- 10% on equipment using the reducing balance method
- 25% on motor vehicles using reducing balance method

iii.

Of the $8,510,000 charged to the utilities, repairs and maintenance account,

$2,300,000 was pre-paid for repairs. Also, accrued wages totaling $5,175,000 has not
been accounted for.

iv.

The equipment was damaged and was disposed of on the balance sheet date with zero
sales proceed.

v.

The fair market value of freehold land as at 31 December 2012 was $60 million. The
directors wish to account for the land at its fair value at balance sheet date.

vi.

Below is an analysis of various expenses by function.

Raw materials & consumables

used plus change in inventories
of FG and WIP
Salaries & wages
Motor vehicle expenses
Depreciation
Utilities, repairs & maintenance*
Fees audit
Directors salaries**
Rental expenses *

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Cost of Distn
Admin.
Total
sales
costs
exps
costs
$000
$000
$000
$000
285,000
0
0 285,000

12,075
1,150
3,105
0
575
519
302,424

10,580
9,200
3,450
1,553
0
0
258
25,041

575
0
575
1,552
1,150
575
258
4,685

23,230
9,200
5,175
6,210
1,150
1,150
1,035
332,150

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*
**

These expenses were apportioned on the basis of the space occupied by the activity.
The three executive directors spent half their time on production and half on
administration.

vii.

Of the 17.25 million ordinary shares in issue, 7.25 million shares were issued during
the year 2012 at $2 each.

viii.

The financial statements, which are to be prepared in compliance with Singapore

Financial Reporting Standards were approved for issue in accordance with a
resolution of the Board of Directors on 31 March 2013.

Required:
a)

Show the necessary journal entries for items (ii) to (v).

b)

Prepare the Statement of profit or loss and other comprehensive income, Statement of
financial position, Statement of changes in equity and Notes to the financial statements
of TED Ltd for the financial year ended 31 December 2012 in a form suitable for
publication.
(Using classification of expenses by function for Statement of
comprehensive income presentation).

c)

Prepare TED Ltds Statement of profit or loss and other comprehensive income for the
year ended 31 December 2012, using classification of expenses by nature.

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Suggested Partial solution to Question 1

(a) Journal Entries (in $000)
ii.

Depreciation expense
Accumulated depreciation

iii.

Salaries & wages expense

Salaries & wages payable
Prepayments
Utilities, repairs and maintenance expenses

iv.

v.

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Accumulated depreciation equipment

Loss on disposal (Asset written off)
Equipment
Freehold land
Revaluation reserve

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(b)

By function
TED Ltd
(Incorporated in Singapore)
Statement of profit or loss and other comprehensive income
for the year ended 31 December 2012
Notes
Revenue
Cost of sales
Gross profit
Loss on disposal
Distribution costs
Administrative expenses
Other expenses
Finance cost
Profit before tax
Income tax expense
Profit for the period
Other comprehensive income
Item that will not be reclassified to profit
or loss:
Revaluation surplus
Total other comprehensive income
Total comprehensive income

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S$'000

[ ]

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TED Ltd
(Incorporated in Singapore)
Statement of financial position as at 31 December 2012
Notes
ASSETS
Non-current assets
Property, plant and equipment

Current assets
Inventories
Trade receivables
Cash in hand
Prepayments

$000

[ ]

[ ]

Total assets
EQUITY AND LIABILITIES
Share capital
Revaluation reserve
Retained earnings
Total equity

[ ]

Non-current liabilities
Debentures
Total non-current liabilities
Current liabilities
Trade payables
Provision for tax
Accrued charges
Bank overdraft
Total current liabilities
Total equity and liabilities
[NB: Alternative presentation formats are acceptable.]

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TED LTD
(Incorporated in Singapore)
Statement of Changes in Equity for the year ended 31 December 2012
Notes

Share
capital
S$000

Balance at 31 December 2011

Total comprehensive income for the year
Issue of share capital
Balance at 31 December 2012

Revaluation
reserve
S$000

Retained
earnings

Total

S$000

S$000

[ ]

TED Ltd
(Incorporated in Singapore)
Notes to the financial statements for the year ended 31 December 2012
1.

General Information
DEF Ltd is a limited liability company incorporated in the Republic of Singapore which
is also the place of domicile. The company is a partly owned subsidiary of XYZ Ltd,
incorporated in Singapore.
The registered office of the company is at
The principal activities of the company consist of manufacturing electronic components
and electrical appliances.
The financial statements for the financial year ended 31 December 2012 were authorized
for issue in accordance with the resolution of the Board of Directors on 31 March 2013.
The financial statements are presented in Singapore dollars because that is the currency
of the primary economic environment in which the company operates. All values are
rounded to the nearest thousand dollars ($000).

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2.

Significant Accounting Policies

(a) Basis of accounting
The financial statements have been prepared in compliance with Singapore Financial
Reporting Standards.
The financial statements have been prepared on the historical cost basis, except for
the freehold land which is carried at revalued amount.
(b) All property, plant and equipment are carried at cost less accumulated depreciation
except for the freehold land which is carried at revalued amount.
(c) Depreciation of property, plant and equipment
Property, plant and equipment are depreciated as follows:
Freehold building
at 2% on a straight-line basis
Equipment
at 10% on a reducing balance basis
Motor vehicles
at 25% on a reducing balance basis
Freehold land is not depreciated.
(d) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is
determined on a .. basis. Net realizable value is the estimated selling
price in the ordinary course of business less estimated costs necessary to make the
sale.

3.

Profit before tax has been arrived at after charging:

S$000
Employee benefits expense
Depreciation expense
[NB: Required only if the Statement of comprehensive income presentation is using
expenses classification by function]

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4.

Property, plant and equipment

Cost/Valuation
At 1 January 2012
Additions
Revaluation adjustment
Disposal
At 31 December 2012
Accumulated depreciation
At 1 January 2012
Charge for the year
Disposal
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011

5.

Freehold
land
$'000

Freehold
building
$'000

Motor
Equipment vehicles
$'000
$'000

14,950

20,700

35,650

3,450

9,200

12,650

11,500

11,500

23,000

Total
$'000

Inventories
$000
Finished goods
Work-in-process

6.

_____
_____

Share capital
Number of shares
(in millions)

Issued and fully paid share capital

As at 1 January 2012
Addition during the year
As at 31 December 2012

The company issued 7.25 million shares at $2 per share during the year 2012.

[NB: Share capital dollar amounts ($000) is not required to be disclosed in the notes to
the financial statements as this has already been shown in the statement of changes in
equity.]
[NB: Breakdown of revaluation reserve is also not required to be disclosed in the notes
to the financial statements as this has already done in the statement of changes in equity.]
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By nature
TED Ltd
(Incorporated in Singapore)
Statement of profit or loss and comprehensive income
for the year ended 31 December 2012
Notes

S$000

Revenue
Changes in inventories
Raw materials & consumables used
Loss on disposal
Employee benefits expense
Depreciation expense
Transport costs
Rental expenses
Utilities, repairs and maintenance expenses
Other expenses #
Finance cost
Profit before tax
Income tax expense
Profit for the period
Other comprehensive income
Item that will not be reclassified to profit or
loss:
Revaluation surplus
Total other comprehensive income
Total comprehensive income

# This includes audit fees and miscellaneous expenses.

-END

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