Question 1
A- Tracy Underhill operates as a sole trader. Below is a trial balance extracted from her books as at
31 December 2017.
Trial balance for Tracy Underhill as at 31 December 2017
Sales revenue
Inventory (as at 1 January 2017)
Purchases
Non-current assets at cost:
Equipment
Motor vehicle
Accumulated depreciation:
Equipment
Motor vehicle
Insurance
Rent
Heating and lighting
Salaries and wages
Motor expenses
Miscellaneous expenses
Receivables
Allowance for receivables
Payables
Cash
Bank loan
Capital
Total
Debit
£
_.
105,800
625,200
Credit
£
695,000
100,000
80,000
10,000
10,000
14,700
30,000
10,000
40,000
15,300
28,500
110,000
14,000
101,500
71,000
1,230,500
100,000
300,000
1,230,500
Additional information is provided for use in preparing the company’s adjustments:
1 The value of closing inventory is £102,500.
2 Interest is payable on the bank loan at eight per cent per annum. The annual amount due as
at 31 December 2017 had not yet been paid.
3 Tracy has paid her rent until 31 March 2018. Her annual rent is £24,000.
4 Office equipment has a useful life of ten years and a residual value of £0. It is to be
depreciated on a straight-line basis.
5 The motor vehicle with a useful life of ten years and an estimated residual value of £30,000
is to be depreciated on a straight-line basis at a rate of 10%.
6 Tracy finds that receivables of £10,000 need to be written off as irrecoverable.
7 The allowance for receivables is to be set at ten per cent of the remaining outstanding
receivables as at 31 December 2017.
8 The heating bill will arrive on 5 January and about £1,000 is expected to relate to the period
until 31 December.
Required:
1) Make the end-of-period adjustments entries
2) Prepare Tracy’s income statement for the year ended December 31, 2017.
3) Prepare Tracy’s balance sheet as at December 31, 2017.
B- What will be the effect on financial statements if an accrued expense is not recorded at the end
of the year?
C- On June 30 of the current calendar year, Apricot Co. paid $9,500 cash for management services
to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses
to expense accounts at the time of cash payment.
Required:
1- Prepare the adjusting entry on December 31 for Apricot Co.
2- Show the effect of the adjusting entry on Income statement and balance sheet at the end of the
Current calendar year
Question 2
A- Keys Company accumulates the following data concerning a mixed cost, using miles as the
activity level.
January
February
March
April
Miles Driven
10,000
8,000
9,000
7,500
Total Cost
$15,000
13,500
14,400
12,500
Required:
1. Compute the variable and fixed cost elements using the high-low method
2. If it is estimated that 12,000 miles will be drive in May, what is the expected total cost for
May?
B- XYZ Company sells its only product for $40 per unit. Its total fixed costs are $180,000 per
annum. Its CM ratio is 20%. XYZ plans to sell 16,000 units this year.
Required:
1. Calculate CM per unit and the variable cost per unit.
2. Calculate break-even point in unit sales and in dollar sales?
3. Calculate the unit sales and dollar sales required to achieve a target profit of $60,000 per year?
4. Assume that the company is able to reduce its variable costs by $4 per unit and accordingly the
sales price per unit will also be reduced by 5%.
a) Calculate the company’s new break-even point in unit sales and in dollar sales?
b) Calculate dollar sales required to achieve a target profit of $60,000?
5. In your opinion, did you think the company would be better off with the assumed reductions in
(4)? Why?
C-Management of Farah Corporation has asked your help as an intern in preparing some key
reports for April. Direct labor cost was $25,000, Total manufacturing costs during April were
$176,000. Direct labor cost was 20% of prime cost.
Required: Calculate direct material cost and the manufacturing overhead cost.
D- Sun Company and Moon Company are identical in all respects except that most of Sun company
costs are variable, and most of Moon company costs are fixed. In case sales increase (for both
companies), which of the two companies will tend to realize the greatest increase in its net income?
Why?
Question 3
A- ABC company has two divisions--Women and Men. The divisions have the following revenues
and expenses:
Sales
Variable costs
Traceable fixed costs
Allocated common corporate costs
Net income (loss)
Women
$ 500,000
200,000
150,000
135,000
$ 15,000
Men
$ 550,000
275,000
180,000
170,000
$ (75,000)
The management of ABC is considering the elimination of the Men Division. If the Men Division
were eliminated, its traceable fixed costs could be avoided. Total common corporate costs would
be unaffected by this decision.
Required:
Should the Company drop Men division? Explain. Support you answer with the necessary
calculations.
B- XYZ Company manufactures and sell wooden product. It wants to prepare cash budget for the
second quarter of the year. The company’s sales budget for the second quarter given below:
Budgeted Credit Sales
April
May
June
Total
$470,000 $670,000 $230,000 $1,370,000
- Credit sales are collected as follows:
25% in the same month of sale, 65% in the month following sale, and 10% in the second month
following sale
- February sales totaled $400,000, and March sales totaled $430,000.
Required:
1. Prepare the cash collection schedule for the second quarter.
2. What is the accounts receivable balance on June 30th?
C- ABC Corporation has estimated the following information for first quarter of 2020 for one of
its products:
Units to be produced
Desired ending inventory of finished goods
January
128,000
30,000
February
140,000
36,000
March
152,000
38,000
The ending inventory at December 2019 was 28,000 units.
Required:
Prepare the Production Budget and the Sales Budget for the first quarter of 2020, assuming selling
price per unit is $20.
D- The following information has been take from a manufacturing company for the year 2019:
Sales revenues 36,000 – opening inventory of materials 10,000 – closing inventory of materials
8,000 – opening inventory of finished goods 6,000 – closing inventory of finished goods 4,000 –
cost of goods produced 26,000
Required: Calculate cost of goods sold and gross profit for the year ended December 31, 2019.
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