Practice questions for mid-semester exam

Non- Current Assets Question 1

Fantastic Tiling Corporation is a tiling manufacturer. Jon Tiler, the founder of the company,
recently approved the purchase of a new truck to support the companys expected growing
business. The companys purchasing manager quickly acquires a truck at the advertised price
of $60,000. She also had to pay $2,500 for dealer related transportation charges, $1,700 for
vehicle related state stamp duty costs, $1,000 for registration costs. Fantastic Tiling expects
to use the truck for 4 years, and estimates that it will have a salvage value of $3,000 at the
end of its 4 year use. She paid cash for all the above costs.
Of the three possible depreciation methods (straight line, reducing balance and units of
production depreciation methods), the accounting department determines that the Reducing
Balance method is the best method to use for depreciating the truck, and the company uses
the simplified method as per the ATO = 2.0 * straight line estimate to do so (NOT the
formula based method). The company is not sure how the truck will be used over the next
four years, though they know the truck will travel approximately 60,000 kms over the 4
years.
The company is also replacing the machine used for glazing. The old machine was originally
recorded at a cost of $110,000 and depreciated over 10 years straight line with no salvage
value. The statement of financial position shows a book value net of accumulated
depreciation at the beginning of the financial year of $44,000. The cost of the new machine is
$150,000 and Jon negotiated to trade in the old machine for $40,000 and pays cash for the
balance.
Required:
1. What is the maximum cost that can be included as part of the trucks purchase cost, as
allowed by the accounting standards? Please journalise this transaction (5 marks)
2. Calculate the depreciation, accumulated depreciation and net book value for each of
the four years of the trucks life, using the reducing balance method as explained in
the question. For this section only please assume (part 2 only) the total recorded
original cost of the truck, which includes the purchase price and all other allowable

costs, is $53,000. It is suggested to use a table format to answer this question. (7

marks)
3. Calculate and journalise all entries relating to the disposal of the old glazing machine.
Show your workings. Assume the disposal happened at 1 January which is half year
into your financial year. (5 marks)
4. Jon also decides to re-value the land of his factory to $2,000,000. This is the first time
Jon is re-valuing the land which had an original cost of 1,500,000. Journalise the entry
necessary. (3 marks)

Solutions to Non-Current Assets Q1:

1. Amounts to include in the purchase cost are:
Purchase price
60,000
Transportation charges
2,500
Stamp duty
1,700
Registration costs
1,000
Total capitalised cost
$65,200
Note: The initial registration cost at time of purchase ($1000) is included in the cost of the
asset. Subsequent registration costs are to be expensed.
Journal to record the cost of the asset:
Dr Motor Vehicle Truck
Cr Cash/Bank

65,200
65,200

2. For this second part of the question, you were to assume total purchase cost is
$53,000 (this is for exam marking purposes so any mistakes dont
Cost of the Asset
Residual value
Depreciable amount
Reducing balance rate

Year 1
Year 2
Year 3
Year 4

(2*25%)

53,000
3,000
50,000
50%

Depreciation Accumulated
Book value at
per year
depreciation
year end
26,500
26,500
26,500
13,250
39,750
13,250
6,625
46,375
6,625
3,313
49,688
3,313
49,688

Calculations:
Year 1: Depreciation = 53,000 * 50% = 26,500
Year 2: Depreciation = 26,500 * 50% = 13,250
Year 3: Depreciation = 13,250 * 50% = 6,625
Year 4: Depreciation = 6,625 * 50% = 3,313
Note: The total amount of depreciation (accumulated depreciation) after 4 years ($49,688)
is not exactly the same as the depreciable amount ($50,000) because of the inaccuracy
using the simplified formula. Therefore the book value is also not exactly the same as the
residual value.
3.
First bring depreciation up to date:
Cost = 110,000/10 years = 11,000 depreciation per year/2 (used half year in current
year) = $5,500
Dr Depreciation expense
$5,500

Cr Accumulated Depreciation

$5,500

Book value at beginning of the year: $44,000

Less depreciation current year
($5,500)
Book value at disposal
$38,500
[Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal
($38,500) = $71,500)
Trade in value
Less BV at disposal
Gain on disposal

$40,000
$38,500
$1,500

Dr New machine
$150,000
Dr Accumulated depr. (old machine)$71,500
Cr Old machine
Cr Gain on sale of asset
Cr Cash

$110,000
$1,500
$110,000

4.
Dr Land

$500,000
Cr Asset Revaluation Reserve

$500,000

Non- Current Assets Q2

Fantastic Tiling Corporation is a tiling manufacturer. Jon Tiler, the founder of the company,
recently approved the purchase of a new truck to support the companys expected growing
business. The companys purchasing manager quickly acquires a truck advertised at a price
of $60,000 and receives a 10% discount. She also had to pay $1,500 to customise the loading
platform, $500 registration for the truck being delivered from Perth $1,700 for vehicle related
state stamp duty costs, $1,500 for non-compulsory car insurance costs. Fantastic Tiling
expects to use the truck for 4 years, and estimates that it will have a salvage value of $3,000
at the end of its 4 year use. She paid cash for all the above costs.
Of the three possible depreciation methods (straight line, reducing balance and units of
production depreciation methods), the accounting department determines that the straight line
method is the best method to use for depreciating the truck.

The truck will travel

approximately 60,000 kms over the 4 years estimated life.

The company is also replacing the machine used for glazing. The old machine was originally
recorded at a cost of $110,000 and depreciated over 10 years straight line with no salvage
value. The statement of financial position shows a book value net of accumulated
depreciation at the beginning of the financial year of $44,000. The cost of the new machine is
$150,000 and Jon negotiated to trade in the old machine for $30,000 and pays cash for the
balance.
Required:
5. What is the maximum cost that can be included as part of the trucks purchase cost, as
allowed by the accounting standards? Please journalise this transaction (5 marks)
6. Calculate the depreciation, accumulated depreciation and net book value for each of
the four years of the trucks life, using the straight line method as explained in the
question. For this section only please assume (part 2 only) the total recorded original
cost of the truck, which includes the purchase price and all other allowable costs, is
$53,000. It is suggested to use a table format to answer this question. (7 marks)
7. Calculate and journalise all entries relating to the disposal of the old glazing machine.
Show your workings. Assume the disposal happened at 1 January which is half year
into your financial year. (5 marks)

8. Jon also decides to re-value the land of his factory to $1,500,000. This is the first time
Jon is re-valuing the land which had an original cost of 2,000,000. Journalise the entry
necessary. (3 marks)

Solutions to Non-Current Assets Q2:

5. Amounts to include in the purchase cost are:
Purchase price less discount
54,000
Customising of loading deck
1,500
Insurance for transport
500
Stamp duty
1,700
Total capitalised cost
$57,700
Non-compulsory insurance ($1,500) is not necessary to bring the asset to its intended
purpose (i.e. to be used) and does not form part of the cost of the asset.
Journal entry to record the cost of the asset:
Dr Motor Vehicle Truck
Cr Cash/Bank

57,700
57,700

6.
Cost of the Asset
Residual value
Depreciable amount
Depreciation rate

Year 1
Year 2
Year 3
Year 4

53,000
3,000
50,000
25%

Depreciation
Accumulated
BV at year
per year
Depreciation
end
12,500
12,500
40,500
12,500
25,000
28,000
12,500
37,500
15,500
12,500
50,000
3,000
50,000

Calculations:
Year 1 to 4: Depreciation = 50,000 * 25% = 12,500
7.
First bring depreciation up to date:
Cost = 110,000/10 years = 11,000 depreciation per year/2 (used half year in current
year) = $5,500
Dr Depreciation expense
$5,500
Cr Accumulated Depreciation
$5,500
Book value at beginning of the year: $44,000
Less depreciation current year
($5,500)
Book value at disposal
$38,500
[Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal
($38,500) = $71,500)
Trade in value
Less BV at disposal
Loss on disposal

$30,000
$38,500
$8,500

Dr New machine
$150,000
Dr Accumulated depr. (old machine)$71,500
Dr Loss on sale of asset
$8,500
Cr Old machine
Cr Cash

$110,000
$120,000

Dr Revaluation expense
Cr Land

$500,000

8.
$500,000

Non- Current Assets Q3

Fantastic Tiling Corporation is a tiling manufacturer. Jon Tiler, the founder of the company,
recently approved the purchase of a new truck to support the companys expected growing
business. The companys purchasing manager quickly acquires a truck at the advertised price
of $60,000. When the company driver picked up the new truck from the factory he incurred a
speeding fine of $1,000 driving too fast in a school zone. She also had to pay $1,000 for
vehicle related state stamp duty costs, $2,000 for registration costs. Fantastic Tiling expects
to use the truck for 4 years, and estimates that it will have a salvage value of $3,000 at the
end of its 4 year use. She paid cash for all the above costs.
Of the three possible depreciation methods (straight line, reducing balance and units of
production depreciation methods), the accounting department determines that the units of
production method is the best method to use for depreciating the truck. The truck will travel
approximately 60,000 kms over the 4 years estimated life.
The company is also replacing the machine used for glazing. The old machine was originally
recorded at a cost of $110,000 with an estimated $10,000 salvage value and depreciated over
10 years straight line. The statement of financial position shows a book value net of
accumulated depreciation at the beginning of the financial year of $55,000. The cost of the
new machine is $150,000 and Jon negotiated to trade in the old machine for $40,000 and pays
cash for the balance.

Required:
9. What is the maximum cost that can be included as part of the trucks purchase cost, as
allowed by the accounting standards? Please journalise this transaction (5 marks)
10. Calculate the depreciation, accumulated depreciation and net book value for each of
the four years of the trucks life, using the units of production assuming the km driven
in year 1 to 4 are 17,000km; 16,000km; 15,000km and 14,000km respectively. For
this section only please assume (part 2 only) the total recorded original cost of the
truck, which includes the purchase price and all other allowable costs, is $53,000. It is
suggested to use a table format to answer this question. (7 marks)

11. Calculate and journalise all entries relating to the disposal of the old glazing machine.
Show your workings. Assume the disposal happened at 1 January which is half year
into your financial year. (5 marks)
12. Jon also decides to re-value the land of his factory with a current book value of
$2,000,000 to $1,700,000. There is also an account called Asset Revaluation Reserve
(Land) that has a credit balance of $500,000. Journalise the entry necessary. (3
marks)

Solutions to Non-Current Assets Q3:

9. Amounts to include in the purchase cost are:
Purchase price
60,000
Stamp duty
1,000
Registration costs
2,000
Total capitalised cost $63,000
Note: The initial registration cost at time of purchase ($2000) is included in the cost of the
asset. Subsequent registration costs are to be expensed. Speeding fines do not form part of
the cost of the asset.
Journal entry to record the cost of the asset
Dr Motor Vehicle Truck
Cr Cash/Bank

63,000
63,000

10.
Cost of the Asset
Residual value
Depreciable amount
Depreciation rate (50,000/60,000km)

Year 1
Year 2
Year 3
Year 4

53,000
3,000
50,000
0.83 cents per km

km travelled Depreciation
Accumulated BV at year
per year
per year
Depreciation end
17,000
14,167
14,167
38,833
16,000
13,333
27,500
25,500
15,000
12,500
40,000
13,000
*12,000
10,000
50,000
3,000
60,000
50,000

Calculations:
Year 1: Depreciation = 17,000km * 0.83 = 14,167
Year 2: Depreciation = 16,000km * 0.83 = 13,333
Year 3: Depreciation = 15,000km * 0.83 = 12,500
Year 4: Depreciation = 12,000km * 0.83 = 10,000
* Even though 14,000km were driven in this year the maximum depreciation for
that year left is 12,000km
11.
First bring depreciation up to date:
Cost = 100,000/10 years = 10,000 depreciation per year/2 (used half year in current
year) = $5,000
Dr Depreciation expense
$5,000
Cr Accumulated Depreciation
$5,000
Book value at beginning of the year: $55,000

Less depreciation current year

($5,000)
Book value at disposal
$50,000
[Accumulated depreciation at disposal = original cost ($110,000) less BV at disposal
($50,000) = $60,000]
Trade in value
Less BV at disposal
Loss on disposal

$40,000
($50,000)
($10,000)

Dr New machine
$150,000
Dr Accumulated depr. (old machine) $60,000
Dr Loss on sale of asset
$10,000
Cr Old machine
Cr Cash

$110,000
$110,000

Dr Asset Revaluation Reserve

Cr Land

$300,000

12.
$300,000

Partnerships question 1
Jane Doe formed a partnership with Jack Jones to start a business offering cleaning services
in Sydney. Jane contributes cash of $100,000 and equipment she purchased a year ago for
$25,000 with a current market value of $20,000. Jack contributes machinery he purchased a
year ago for $40,000, with a current market value of $30,000. The partners decide to split the
first $30,000 of their profits/losses in proportion to their capital contributions to the
partnership, and any additional profits/losses in the proportions of 60% to Jane and 40% to
Jack.
Their business turns out to be quite successful, and earns a profit of $50,000 in their first
year. Michael Williams is impressed at Jane and Jacks management of the business, and
offers $20,000 cash to them personally for a 10% stake in the partnership. Jack and Jane
accept this offer, sharing the cash equally and give Michael 10% of the partnership capital.
This 10% capital is contributed in the proportion of their initial capital contributions when
starting the business.
The partnership earns a lower profit of $15,000 in their second year, which they agree to split
in proportion to their current capital balances. Finally, the partners revalue their machinery
upwards by $20,000, and equipment downwards by $10,000, and distribute any revaluations
equally.
Required: Please journalise all transactions relevant for the above events.

Solution Partnerships question 1:

1. Journalise the formation of the partnership
Dr Cash
$100,000
Dr Equipment
$20,000
Dr Machinery
$30,000
Cr Jane Doe Capital
Cr Jack Jones Capital

$120,000
$30,000

Note: Jane contributes 120,000 of 150,000 in total capital (80%), therefore Jack contributes
20%.
2. Journalise the distribution of profit in year 1
Jane profit share ($30,000*80% + 60%*$20,000) = $36,000
Jack profit share ($30,000*20% + 40%*$20,000) = $14,000
Dr. Income summary
$50,000
Cr Jane Doe Capital
Cr Jack Jones Capital

$36,000
$14,000

3. Journalise entry of Michael Williams into the partnership.

Total capital now in the partnership: Jane Doe $120,000 + $36,000 = $156,000
Jack Jones $30,000 + $14,000 = $44,000
Total capital = $200,000, so 10% is $20,000. Jane gives $80% of $20,000 = $16,000, while
Jack gives the remaining 20% or $4,000. The journal entry is therefore as follows:
Dr. Jane Doe Capital
$16,000
Dr Jack Jones Capital
$4,000
Cr. Michael Williams Capital

$20,000

4. Journalising 2nd year profit of $15,000

Jane Doe capital is $156,000 - $16000 = $140,000
Jack Jones capital is $44,000 - $4,000 = $40,000
Michael Williams capital = $20,000
Dr. Income summary $15,000
Cr. Jane Doe Capital
(140,000/200,000 * 15000)
Cr. Jack Jones Capital
(40,000/200,000 * 15000)
Cr. Michael Williams Capital (20,000/200,000 * 15000)

$10,500
$3,000
$1,500

5. Journalise upwards and downwards revaluations

Dr Machinery
$20,000
Cr. Equipment
$10,000
Cr. Jane Doe Capital
(10,000* 1/3)
Cr. Jack Jones Capital
(10,000* 1/3)
Cr. Michael Williams Capital (10,000* 1/3)

$3,333.33
$3,333.33
$3,333.33

Partnerships question 2
Mandy, Dave and Bill form a partnership to start a business selling toys. Mandy provides
cash of $60,000, while Dave contributes toys he bought a year ago for $30,000, and with a
market value of $40,000. Bill contributes $30,000 to purchase equipment for moving large
boxes of toys. All partners agree that profits/losses will be split equally.
The toy shop performs surprisingly well, and at the end of its first year, reports a profit of
$60,000. Mandy and Dave agree to contribute another $25,000 each to the partnership, to
allow an expansion of the business into two toy stores. All partners agree that profits in the
future will be split 40% to Mandy, 40% to Dave, and 20% to Bill. The partnership earns a
profit of $80,000 in its second year.
Bill is quite upset that Mandy and Dave are earning double the profit share that he does, and
he requests to exit the partnership. He agrees to accept a $50,000 payout from the
partnership, and any bonus or loss received or incurred by Mandy and Dave in relation to
Bills partnership payout, is shared 60% by Mandy and 40% by Dave.
Required: Please journalise all transactions relating to the above events.

Solution to Partnerships question 2

1. Journalise formation of partnership
Dr Cash
$60,000
Dr. Toys Inventory $40,000
Dr. Equipment
$30,000
Cr Mandy Capital
Cr Dave Capital
Cr Bill Capital

$60,000
$40,000
$30,000

2. Journalise distribution of profit in year 1

Dr Income summary $60,000
Cr Mandy Capital
Cr Dave Capital
Cr Bill Capital

$20,000
$20,000
$20,000

3. Journalise additional contributions by Mandy and Dave

Dr Cash
$50,000
Cr. Mandy Capital
Cr. Dave Capital

$25,000
$25,000

4. Journalise distribution of profit in year 2

Dr. Income summary $80,000
Cr Mandy Capital
Cr Dave Capital
Cr Bill Capital

$32,000
$32,000
$16,000

5. Journalise Bills exit from the partnership

Mandys capital balance is now 60000 + 20000 + 25000 + 32000 = $137,000
Daves capital balance is now 40000 + 20000 + 25000 + 32000 = $117,000
Bills capital balance is now 30000 + 20000 + 16000 = $66,000
Bill accepts 50,000, when his capital share is 66,000. The 16,000 extra capital is shared 60%
to Mandy, 40% to Dave. Here is the following journal entry to reflect these events:
Dr. Bill, capital
$66,000
Cr Cash at Bank
Cr Mandy capital (60% of 16000)
Cr Dave capital (40% of 16000)

$50,000
$9,600
$6,400

Partnerships question 3
Will and Kate form a partnership selling royal souvenirs to tourists. Both contribute cash of
$20,000 each to commence the partnership, but Kate also contributes $20,000 in souvenirs to
the business, while Will additionally contributes $30,000 in equipment to move the
souvenirs. They agree that any profits/losses will be shared equally.
The partnership struggles from the beginning, with tourists not really purchasing their
products. Within 6 months, both Will and Kate agree to go their separate ways, and
terminate the partnership.
Here is a brief of their balance sheet:
Assets:
Cash

$15,000

Inventory

$15,000

Equipment (net book value) $25,000

Liabilities:
Bank Loan

$25,000

Partnership owners equity:

Will Capital

$20,000

Kate capital

$10,000

Subsequently, the equipment is sold for $20,000. The souvenirs are sold at a fire sale,
yielding cash revenues equal to half their cost as reported in the asset section above.
Required: Journalise the formation of the partnership, and dissolution of the partnership.

Solutions to Partnerships question 3

1. Journalise the formation of the company
Dr Cash
$40,000
Dr Souvenirs Inventory $20,000
Dr Equipment
$30,000
Cr. Will, capital
Cr. Kate, capital

$50,000
$40,000

2. Liquidating the company - sell assets for cash (step 1)

Dr Cash
$27,500
Dr. Will, Capital
$6,250
Dr. Kate, Capital
$6,250
Cr Equipment
Cr Souvenirs Inventory

$25,000
$15,000

Step 2 pay off liabilities

Dr Bank loan payable $25,000
Cr Cash

$25,000

Step 3 use remaining cash to pay back owners

Dr Will, capital (20,000 6250)
Dr Kate, capital (10,000 6250)
Cr. Cash

$13,750
$3,750
$17,500

Cash Flows Question 1

Consider the following information, relating to Betty Ltds 2012 calendar year data:
Interest received

$2,000

Gain on sale of old machinery

$9,000

Interest Paid

$3,000

Dividends Received

$4,000

Dividends Paid

$5,000

Amortisation Expense

$12,000

Cash received from customers

$45,000

Cash paid to shareholders for share buy-back

$30,000

New machinery purchased for $50,000 cash - half paid now, remainder to be paid next year.
Old machinery sold for cash payment

$40,000

Rent paid

$25,000

Depreciation

$65,000

Loan repayment (principal only)

$15,000

Required:
1. What is the cash flow from operations?
2. What are the net investing cash flows?
3. What is the net financing cash flow?
4. If their ending 2012 bank balance is $815,000, what was the starting 2012 bank balance?

Solutions to Cash Flows Question 1

1. Operating cash flows
Cash received from customers
Dividends Received
Interest Received
Interest Paid
Rent paid
Net cash inflows from operational activities

$45,000
$4,000
$2,000
($3,000)
($25,000)
$23,000

2. Investing cash flows

New machinery purchased
Old machinery sold
Net cash inflows from investing activities

($25,000)
$40,000
$15,000

3. Financing cash flows

Dividends paid
Loan repayment
Share buyback
Net cash outflows from financing activities

($5,000)
($15,000)
($30,000)
($50,000)

4. Ending cash balance = $815,000, change in cash = $23,000 + $15,000 - $50,000 =

($12,000), so beginning cash balance must be $815,000 ($12,000) = $827,000.
The opening cash balance was therefore $827,000. This period, cash flows reduced by
$12,000, explaining the ending cash balance of $815,000.

Cash Flows Question 2:

Consider the Johns Pty Ltd comparative balance sheet data below, as well as other
information. Please calculate the net cash flows from operating activities for the 2010
calendar year, using the data below:

Calendar year

2009

2010

Cash at Bank

$10,000

$25,000

Acs Receivable

$6,000

$9,000

Acs Payable

$7,000

$12,000

Prepaid Insurance

$10,000

$6,000

Unearned revenues

$14,000

$7,000

Interest payable

$8,000

$4,000

Inventory

$12,000

$16,000

Motor vehicles

$100,000

$90,000

Acc Depn Motor Vehicles

$40,000

$55,000

Johns Pty Ltd sold some equipment for $18,000 in 2010. Its original cost was $25,000, and
its accumulated depreciation till the time of sale was $5,000. It purchased a replacement
vehicle on the last day of the 2010 calendar year. The net profit after tax for the 2010
calendar year was $25,000, and the 2009 calendar year was $15,000

Solution to Cash Flows Question 2

Net Profit
Add back: Depreciation ($55,000 - $40,000 + $5,000)
Add back: Loss on Sale of Equipment ($18,000 ($25,000 - $5,000)
Add back:
Increase in Acs Payable
Decrease in Prepaid Insurance
Subtract:
Increase in Acs Receivable
Decrease in Unearned Revenues
Decrease in Interest Payable
Increase in Inventory

$25,000
$20,000
$2,000

Net Operating Cash Inflows

$38,000

$5,000
$4,000
($3,000)
($7,000)
($4,000)
($4,000)

Cash Flows Question 3

A flood has washed away all electronic and physical records of Jamie Pty Ltds accounts,
except the information below. Consider the following revenue and expense account balances,
and comparative balance sheet items.

2012 Profit and loss statement items

Revenues

$500,000

COGS

($200,000)

Interest revenue

$20,000

Depreciation Expense

($15,000)

Taxation expense

($20,000)

Amortisation expense

($5,000)

Gain on sale of equipment

$7,000

Loss on sale of machinery

($2,000)

Salary expense

($125,000)

There are no other profit and loss accounts this period, than those given above.

All relevant balance sheet items:

Acs Payable up

$4,000

$7,000

Salary Payable down

$17,000

$10,000

Inventory up

$12,000

$20,000

Unearned Revenues up

$10,000

$20,000

Interest receivable down

$12,000

$5,000

Required: What is the net operating cash flow for 2012?

Solution to Cash Flows Question 3

Revenues
Interest revenue
Gain on sale of equipment
COGS
Depreciation Expense
Taxation expense
Amortisation expense
Loss on sale of machinery
Salary expense
Net Profit

$500,000
$20,000
$7,000
($200,000)
($15,000)
($20,000)
($5,000)
($2,000)
($125,000)
$160,000

Indirect cash flow method

Net Profit:
Add back:
Depreciation
Amortisation expense
Loss on sale of machinery

$160,000
$15,000
$5,000
$2,000

Subtract:
Gain on sale of equipment

($7,000)

Add back:
Acs Payable increase
Unearned Revenues increase
Interest receivable decrease

$3,000
$10,000
$7,000

Subtract:
Salary payable decrease
Inventory increase

($7,000)
($8,000)

Net operating cash inflows

$180,000