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Monash University
Semester One Examination 2012
Faculty of Business and Economics
Department of Accounting and Finance
EXAM CODES:
AFC1000
TITLE OF PAPER:
EXAM DURATION:
3 hours
READING TIME:
10 minutes
THIS PAPER IS FOR STUDENTS STUDYING AT: (office use only - tick where
applicable)
Berwick
Clayton
Open Learning
Caulfield
Sunway
Gippsland
Hong Kong
Other (specify)
During an exam, you must not have in your possession, a book, notes, paper,
calculator, pencil case, mobile phone or any other material/item which has not been
authorised for the exam or specifically permitted as noted below. Any material or
item on your desk, chair or person will be deemed to be in your possession. You are
reminded that possession of unauthorised materials in an exam is a disciplinable
offence under Monash Statute 4.1.
AUTHORISED MATERIALS
CALCULATORS
YES
NO
(If YES, only calculators with an 'approved for use' Faculty label are permitted)
OPEN BOOK
YES
NO
YES
NO
This paper consists of ten (10) questions printed on a total ofeight (8) pages.
DESK NUMBER: .
Page 1 of 8
Question 1
10 marks
You are the accountant for Serry Company which has agreed to act as a
guarantor on a loan of $2 million obtained by Webster and Sons. Serry
Company, as guarantor, is required to pay back the loan if Webster and Sons
cannot pay.
In light of the AASB Framework, justify how the guarantee of the loan would
be shown in the books of Serry Company.
Question 2
14 marks
The following information relates to Judd Ltd and Hayes Ltd respectively. Both
companies operate in the veterinary products industry.
2010
.12
1.41
.38
.27
5.8
Judd Ltd
2011 2012
.13
.17
1.63
1.87
.41
.43
.23
.17
6.7
7.9
Hayes Ltd
2010 2011 2012
.12
.10
.09
1.71
1.46
1.26
.36
.32
.27
.51
.56
.58
2.3
2.2
2.1
Required:
Evaluate and compare the profitability and solvency of the two companies. In
doing so, discuss reasons why the profitability and solvency differ between
the two companies.
Page 2 of 8
Question 3
(2 + 2 + 2 + 2)=8 marks
The following relates to Morningstar Enterprises. The entity uses the accrual
system of recognising transactions. At the end of the financial year on 30
June 2011, the following balance day adjustments and other information have
not been entered into the general ledger.
(a) Annual rent revenue for the financial year of $60,000 is receivable in
four equal quarterly instalments. To 30 June 2011, only three instalments
have been received.
(b)The account, office supplies on hand, has a debit balance of $410 on 1
July 2010. Supplies of $360 were purchased during the year (the
accounts clerk usedthe asset approach to record inventories of supplies).
On 30 June 2011, $110 of supplies are on hand.
(c) Morningstar Enterprises purchased equipment on 1 July 2009 at a cost of
$200,000 with a residual value of $50,000.The life of the equipment was
expected to last for 5 years but Morningstar Enterprise expected to use
it for 3 years. The company adopted the straight line method of
depreciation.
(d)Morningstar Enterprises pays its insurance annually in advance on 1 May
each year and records it as an expense. On 1 May 2011 the annual
premium was $2,700.
Required:
Prepare the journal entries to record the necessary adjustments on 30 June
2011 for each of the above items (narrations not required).
Question 4
(7 + 3 = 10 marks)
Your accountant has come to you, the CFO of a small company, for advice. He
says he cannot choose between the following competing projects as the
overall profit and return is the same.
Year
0
1
2
3
Project A
$100,000
$60,000
$50,000
$40,000
Project B
Project C
-$100,000
$50,000
$50,000
$50,000
-$100,000
$40,000
$50,000
$60,000
Required:
(a) If the company requires a 12 per cent rate of return, which project would
you choose?
Page 3 of 8
(b)Explain your decision to your accountant why you choose the project
you did pointing out the reason that he could not come to a decision.
Question5
(3 + 3 = 6 marks)
Share A is currently trading at $22, and is expected to pay a dividend of
$1.50 in a years time, and dividends are expected to grow at a constant rate
of 5 per cent per year.
Share B is currently trading at $12.5, and is expected to pay a dividend of
$1.50 in a years time, and dividends are expected to grow at a constant rate
of zero per cent.
Share C is currently trading at $8, and is expected to pay a dividend of $1.50
in a years time, and dividends are expected to grow at a constant rate of -2
per cent.
Required:
(a) Calculate the intrinsic value of each share if your required rate of return
is 12 per cent.
(b)Which share would you buy and why? Explain your answer.
Question 6
(2 + 2 = 4 marks)
Define and explain using an example, Business risk and financial risk.
Question 7
(4 + 8 = 12 marks)
a)
b)
Page 4 of 8
Question 8
(2 + 2 + 2 + 2 + 3 = 11 marks)
Page 5 of 8
Question 9
(6 + 4 + 2 = 12 marks)
June
July
August
September
(actual)
(actual)
(expected)
(expected)
(expected)
$75,000
$66,000
$61,000
$82,000
$88,000
Required:
(a) Prepare a schedule of cash receipts expected from credit customers for
the months of July, August and September 2012.
(b)Determine the cash surplus (deficit) for the month of July 2012 by
providing the details of cash receipts and cash payments for July 2012 in
the form of a cash budget.
Page 6 of 8
(2 + 2 + 3
Bendigo
Total
878,600
226,500
1,105,100
(528,200)
(149,900)
(678,100)
Contribution margin
350,400
76,600
427,000
(119,700)
(58,600)
(178,300)
230,700
18,000
248,700
(88,200)
(37,800)
(126,000)
142,500
(19,800)
122,700
281,000
119,000
400,000
Sales Revenue
Variable costs
5%
Investment required
The management accountant has prepared the above information for the
owner. He must explain the difference in performance across the two
locations. All inventory is purchased by the head office which is located in
Melbourne City. There is no difference in cost price of inventory between
stores, but delivery costs may vary. The owner has a policy of ensuring the
selling price is consistent between locations.
Required:
(a) Calculate the return on investment (ROI) for each of the two divisions.
(b)Calculate the residual income (RI) for each of the two divisions.
(c) Discuss the performance of the Caulfield store in comparison to the
Bendigo store based on absolute profit, and your calculations of ROI and
RI.
Page 7 of 8
(d)The management accountant is concerned that the owner will see the
results and want to close the Bendigo store. Explain whether you agree
with that suggestion.
(e) Analyse possible reasons for the difference in variable costs and fixed
costs between the stores.
END OF EXAMINATION
Page 8 of 8