Accountancy & Auditing, Paper I

During the current year, Hitchcock Developers disposed of plant assets in the following transactions. Feb. 10. Office equipment costing 24 , 000 w a s g i v e n t o a s c r a p d e a l e r a t n o c h a r g e . A t t h e d a t e o f d i s p o s a l , a c c u m u l a t e d d e p r e c i a t i o n o n t h e o f f i c e e q u i p m e n t a m o u n t e d t o 24,000 was given to a scrap dealer at no charge. At the date of disposal, accumulated depreciation on the office equipment amounted to 24 , 000 w a s g i v e n t o a scr a p d e a l er a t n oc ha r g e . A tt h e d a t eo f d i s p os a l , a cc u m u l a t e dd e p r ec ia t i o n o n t h eo f f i cee q u i p m e n t am o u n t e d t o 21,800. Apr. 1. Hitchcock sold land and a building to Claypool Associates for 900 , 000 , r e c e i v i n g 900,000, receiving 900 , 000 , r ece i v in g 100,000 cash and a 5-year, 9 percent note receivable for the remaining balance. Hitchcock's records showed the following amounts: Land, 50 , 000 ; B u i l d i n g , 50,000; Building, 50 , 000 ; B u i l d in g , 550,000; Accumulated Depreciation: Building (at the date of disposal), $250,000. Aug. 15. Hitchcock traded in an old truck for a new one. The old truck had cost 26 , 000 , a n d i t s a c c u m u l a t e d d e p r e c i a t i o n a m o u n t e d t o 26,000, and its accumulated depreciation amounted to 26 , 000 , an d i t s a cc u m u l a t e dd e p r ec ia t i o nam o u n t e d t o 18,000. The list price of the new truck was 39 , 000 , b u t H i t c h c o c k r e c e i v e d a 39,000, but Hitchcock received a 39 , 000 , b u t H i t c h coc k r ece i v e d a 10,000 trade-in allowance for the old truck and paid$28,000 in cash. Hitchcock includes trucks in its Vehicles account. Oct. 1. Hitchcock traded in its old computer system as part of the purchase of a new system. The old system had cost 15 , 000 , a n d i t s a c c u m u l a t e d d e p r e c i a t i o n a m o u n t e d t o 15,000, and its accumulated depreciation amounted to 15 , 000 , an d i t s a cc u m u l a t e dd e p r ec ia t i o nam o u n t e d t o 11,000. The new computer's list price was 8 , 000. H i t c h c o c k a c c e p t e d a t r a d e − i n a l l o w a n c e o f 8,000. Hitchcock accepted a trade-in allowance of 8 , 000. H i t c h coc k a cce pt e d a t r a d e − ina l l o w an ceo f 500 for the old computer system, paying 1 , 500 d o w n i n c a s h a n d i s s u i n g a 1 − y e a r , 8 p e r c e n t n o t e p a y a b l e f o r t h e 1,500 down in cash and issuing a 1-year, 8 percent note payable for the 1 , 500 d o w nin c a s han d i ss u in g a 1 − y e a r , 8 p er ce n t n o t e p a y ab l e f or t h e 6,000 balance owed.

S, T and Q were partners sharing profits in the proportion of 3:2:1. Their capitals on 31st December 2021, stood at 45 , 000 , 45,000, 45 , 000 , 15,000 and 15 , 500 r e s p e c t i v e l y a f t e r a d j u s t m e n t s o f n e t p r o f i t o f 15,500 respectively after adjustments of net profit of 15 , 500 r es p ec t i v e l y a f t er a d j u s t m e n t so f n e tp r o f i t o f 18,000 for the year ending that date and drawings of 6 , 000 , 6,000, 6 , 000 , 4,000 and $2,000 respectively. It was discovered that while ascertaining the profits, the accountant did not take into consideration the following matters: Interest @ 6$12,000 was purchased on the date of reallocation of profit, but no entry has been passed in that respect for which each partner contributed equal capital. A loan of $5,000 from T as brought-forward from 2020 carrying interest at 8% p.a. was merged into his capital on July 1, 2021. No interest on loan was, however, charged to Profit and Loss Account.

Listed below are five items that may or may not require disclosure in the notes that accompany financial statements. Required : For each case, explain what, if any, disclosure is required under generally accepted accounting principles. Explain your reasoning.

Juarez Inc. had the following inventories on March 1: Finished Goods $15,000 Work in Process$19,070 Materials $17,000 The work in process account controls three jobs: Job 621 Job 622 Job 623 Materials$2,800 $3,400$1,800 Labour 2,100 2,700 1,350 Applied Factory-Overhead 1,680 2,160 1,080 Total $6,580$8,260 $4,230 The following information pertains to March operations: Materials purchased and received cost$19,000 at terms n/30. Materials requisitioned for production cost 21 , 000. O f t h i s a m o u n t , 21,000. Of this amount, 21 , 000. O f t hi s am o u n t , 2,400 was for indirect materials; the difference was distributed: 5 , 300 t o J o b 621 ; 5,300 to Job 621; 5 , 300 t o J o b 621 ; 7,400 to Job 622; and $5,900 to Job 623 Materials returned to the storeroom from the factory totaled 600 , o f w h i c h 600, of which 600 , o f w hi c h 200 was for indirect materials, the balance from Job 622. Materials returned to vendors totaled$800. Payroll of $38,000 was accrued in March. Of the payroll, direct labor represented 55$6,320 to Job 623. Factory overhead, other than any previously mentioned, amounted to 9 , 404.50. I n c l u d e d i n t h i s f i g u r e w e r e 9,404.50. Included in this figure were 9 , 404.50. I n c l u d e d in t hi s f i g u r e w er e 2,000 for depreciation of factory building and equipment and 250 f o r e x p i r e d i n s u r a n c e o n t h e f a c t o r y . T h e r e m a i n i n g o v e r h e a d , 250 for expired insurance on the factory. The remaining overhead, 250 f or e x p i r e d in s u r an ceo n t h e f a c t or y . T h er e mainin g o v er h e a d , 7,154.50, was unpaid at the end of March. Factory overhead was applied to production at a rate of 80% of the direct labor cost to be charged to the three jobs, based on the labor cost for March. Jobs 621 and 622 were completed and transferred to the finished goods warehouse. Both Jobs 621 and 622 were shipped and billed at a gross profit of 40% of the cost of goods sold. Cash collections from accounts receivable during March were $69,450.

Wheeler Company, a small supplier of computer parts, is currently producing a new computer sensory unit. The company has been producing 150 units per week and factory overhead (all fixed) was estimated to be $1,200 per week. The following is a schedule of the pay rates of three workers assigned to the new component: Employee Hourly rate Clancy, D$6.00 Lukan, T 8.00 Schott, J 7.00 Customers have been calling in for additional units, but management does not want work to exceed 40 hours per week. To motivate its employees to produce more, the company decided to institute an incentive wage plan. Under the plan, each worker would be paid a base rate per hour, as shown in the following schedule, and a premium of $1 per unit for all units when the total number exceeds 150. Employee Base rate Clancy, D$3.50 Lukan, T 5.50 Schott, J 4.50 The first week the plan was put into operation, production increased to 165 units. The shop superintendent studied the results and considered the plan too costly. Production had increased 10%, but the labour cost had increased by approximately 23.2%. The superintendent requested permission to redesign the plan to make the labour cost increase proportionate to the productivity increase.

Utilities expense is recorded as monthly bills are received. No adjusting entries for utilities expense are made at month-end. Required Part Requirement Marks (a) For each of the numbered paragraphs (1–9), prepare the necessary adjusting entry (including an explanation). (08) (b) Refer to the balances in the unadjusted trial balance at August 31. How many months of expense are included in each of the following account balances? (Note: Campus Theater adjusts accounts monthly; accounts were last adjusted on July 31, current year.) (09) 1. Utilities Expense 2. Depreciation Expense 3. Accumulated Depreciation: Building (c) Assume the theater has been operating profitably all year. Although the August 31 trial balance shows substantial income taxes expense, income taxes payable is a much smaller amount. This relationship is quite normal throughout much of the year. Explain. (03) Total Marks (20)