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ACCOUNTING FOR DECISION MAKING OBJECTIVE PART NOTE: Attempt all questions Question # 1: i) Tick the correct answers:

Total Time: 45 Minutes 20 Marks



Capital expenditure is a) The extra capital paid in by the proprieter. b) The cost of running the business on a day to day. c) Money spent on buying the first asset or adding value to them. d) Money spent on repair & maintenance of the asset. Which of the followings are fixed assets. a) Cash, machinery, bank o/d, debtors. b) Capital, loan, plant,furniture. c) Land, investment, plant, goodwill. d) Land,building,cash,creditor. What is the amount of accumulated depreciation of the plant. If it was sold for $ 10000 & cost is $ 25000. Gain on the sale is $ 2000. a) $ 18000 b) $17000 b) $16000 d) $15000 Which of the following costs are included in inventory costs of manufacturing business. a) Purchase price, freight in, freight out, plant depreciation used in manufacturing. b) Purchase price, freight in, import duty, plant depreciation used in manufacturing. c) Purchase price, freight in, freight out, storage cost. d) Purchase price, freight in, freight out, selling cost. Closing stock was undervalued, but opening stock was correct, what would the effect be on the profit. a) No effect b) Profit is understated c) Profit is overstated d) Profit is impossible to calculate What is a double entry to record closing inventory. a) Inventory a/c dr. i/s a/c cr. b) Inventory a/c dr. cost of sales a/c cr. c) i/s a/c dr. inventory a/c cr. d) i/s a/c dr. cost of sales a/c cr.








What is the prime objective of the business? a) To increase the market share. b) To increase the profit. c) To increase the goodwill. d) To produce the quality products & services. Balance Sheet provides the informations about a) Financial performance b) Cash flows c) Financial Positions Something payable to 3rd parties is called a) Equity b) Asset c) Expenditure d) Liability Liability of owners is limited in a) Soleproprietership b) Company c) Partnership 10 Marks

QUESTION # 2: Fill in the blanks: i) ii) iii) iv) v)

Assets those have a no physical existence are called______________________. Liability towards business owners is called_____________________________. Inventory should be valued at _________________ of cost or NRV. The cost varies in directly with the volume of production is called_____________________. The systematic allocation of the depreciable amount over the useful life of the asset is called_____________________________. 10 Marks

QUESTION # 3: briefly answer the followings: i) ii) iii) iv) v) Prudence concept. Materiality concept. Corporation. Separate Legal Entity. Tangible fixed Assets.

ACCOUNTING FOR DECISION MAKING SUBJECTIVE PART NOTE: Attempt any four questions. All questions carry equal marks. Total Time: 2 Hours 15 Minutes

Question 1 : ABC Co. purchased a new milling machine. The following data relate to the purchase : Invoice price of new machine to ABC Co. --- $10,000. Price of new machine with no trade-in deal --- $9,200. Terms of sale --- 2%, 10 days , net 30 days on cash payment portion of purchase. The ABC Co. received a trade-in allowance of $6,000 on a machine that cost $12,000 new and had a present book value of $4,000. The Express delivery service charged ABC Co. $300 to deliver the machine . Give the entry to record the acquisition of new machine.

Question 2 : Downtown Stores acquires a delivery truck , making payment of $1,781.46 , the payment being analyzed as follows : Price of truck. $2,208.00 Charges for extra equipment . 124.00 State sales tax , 3% of $2,332.00.. 69.96 Insurance for one year 88.00 Lisence and tax for remainder of 1972 41.50 $2,531.46 Less trade-in allowed on old truck.. 750.00 Cash paid.. $1,781.46 The old truck costs $2,000 and had a book value of $550 on the date of the trade. Give the entry to be made by Downtown Stores to record the exchange , assuming each of following procedures : (a) Any difference between the book value of the asset traded in and the trade-in allowance is recognized as an extra ordinary gain or loass. (b) Any difference between the book value of asset traded in and the trade-in allowance is recognized as an adjustment in basis of the new asset in accordance with income tax requirements.

Question 3 : The Milroy Corporation summarizes manufacturing and construction activities for 1972 as follows : On Product Manufacture Matrials $120,000 Direct Labor 105,000 On Building Wing Construction $24,000 30,000

Overhead for 1971 was 80% of the direct labor cost . Overhead in 1972 related to both product manufacture and construction activities totaled $91,500. (a) Calculate the cost of building addition , assuming that manufacturing activities are to be charged with overhead at the rate experienced in 1971 and that construction activities are to be charged with excess. (b) Calculate the cost of addition if manufacturing and construction activities are to be charged with overhead at the same rate. Question 4: The Ringwood Corporation users raw material A in a manufacturing process . Information as to be balance on hand , purchases and requisitions of material A are given in following table : Quantities Date Jan . 11 Jan. 24 Feb. 8 Mar.16 June 11 Aug. 18 Sept. 6 Oct. 15 Dec. 29 Received --300 ----150 ----150 --Issued ----80 140 --130 110 --140 Balance 100 400 320 180 330 200 90 240 100 Unit Price of Purchase $1.50 1.56 ----1.60 ----1.70 ---

Instruction : What is the closing inventory under each of the following pricing methods ? (1)Perpetual fifo (4)Periodic fifo (2)Perceptual lifo (5) Periodic lifo (3)Moving average (6)Weighted average Question 5 : The Buffalo Products Company reports its inventories at lifo. Inventories are composed of three classes of three classes of goods . Values are assigned to each class as follows : unit equal to the number on hand when lifo was adopted are assigned average costs as of this date ; annual incremental layers thereafter are assigned the average cost for the period. Lifo was adopted in 1970 . the inventory on January 1 , 1973 , and purchases and sales for 1973 were as follows :

Model A Units 1970 balance 40,000@$.10 1971 Increment.. 40,000@$.10 1972 Increment 40,000@$.10 Total.. 70,000 Purchases 1973 Sales 1973

Inventory , January 1 , 1973 Model B Amount Units $4000 $4000 $4000 $8,700 20,000@$.60 20,000@$.60 20,000@$.60 21,500

Amount $12,000 $12,000 $12,000 $13,500

Model C Units Amount 5,000@$3.00 $15,000 5,000@$3.00 $15,000 5,000@$3.00 $15,000 7,000 $21,500

40,000@$.10 40,000@$.10

$4000 $4000

20,000@$.60 20,000@$.60


5,000@$3.00 $15,000

$12,000 5,000@$3.00 $15,000

Instruction :Prepare a statement reporting sales , cost of goods sold (including purchases and inventory detail ) , and gross profits of each class of goods handled and for combination activities as of December 31, 1973 . Provide supporting schedules to show how the ending inventory balances are developed for each class as goods.

Question 6 : The Nelson Construction Company purchased 50 acres of land in the suburbs of a large city with the invention of improving , subdividing , and selling it in one acre lots. The purchase price for the trace of land was $210,000 . The lots are given numbers and similar lots are groups numerically . Lots 1-15 are choice lots and did not require extra improvements . They will sell for $8,000 each . Lots 16-30 required some extra improvements costing $34,000 . They will sell for $7,000 each . Lots 31-50 required extensive drainage and clearing cost $40,000 . They will sell for $6,500 each. Question 7 : The Erdman Manufacturing Company produces one principal product . The income from sale of this product for the year 1972 is expected to be $200,000 . Cost of goods sold will be as follows : Material used. $40,000 Direct Labour. 60,000 Fixed overhead. 20,000 Variable overhead. 30,000 The company realizes that it is facing rising costs and in December is attempting to plan its operations for the year 1973 . It is believed that if the product is not redesigned , the following results will be obtained : Material prices will average 5% higher and rates for direct labor will average 10% higher . Variable overhead will vary in proportion to direct labor costs . If the sale price is increased to produce the same rate of gross profit as the 1972 rate , there will be a 10% decrease in number of units sold in 1973.

A difficult grade of material would be used , but 10% more of it would be required for each unit . The price of this proposed grade was averaged 5% below the price is expected to continue for the year 1973 . Redesign would permit a change in processing method enabling the company to use less skilled workman . It is believed that the average pay rate for 1973 would be 10% below the average for 1972 because of that change. However , about 20% more labor per unit would be required than was needed in 1972. Variable overhead is incurred directly in relation to production ; it is expected to increase 10% because of price changes and to increase an additional amount in proportion to change in labor hours. Instructions : Assuming the accuracy of these estimates , prepare statements showing the prospective gross profit if : (1) The same product is continued in 1973. (2) The product is redesigned for 1973. (AICPA adopted) Question 8: The errors listed below were made by the Marshell Sales Corporation in 1972.Give the entry required in 1973 to correct each error .Assume that the company arrives at the inventory position by physical count and that the books for 1972 have been closed . Assume that all amounts are material. (a) The company failed to record a sale on account of $210 at the end of 1972. The merchandised had been shipped and was not included in the ending inventory . The sale was recorded in 1973 when cash was collected from the customer. (b) The company failed to recognize $400 due from a consignee as a result of goods sold by this party at the end of 1972 . The consignee had failed to report the sale of consigned goods and the company included their cost of $260 inventory as Goods on Consignment. (c) The company failed to recognize a purchase on account of $1,350 at the end of 1972 and also failed to include the goods purchased in the ending inventory. The purchase was recorded when payment was made to creditor in 1973. (d) The company failed to make an entry for the purchase on account of $60 at the end of 1972, although it included this merchandise in the inventory count. The purchase was recorded when payment was made to the creditor in 1973. (e) The company overlooked goods of $360 in the physical count of goods at the end of 1972. Question 9 : (a)Gray corporation uses the direct costing for internal reporting .It has been suggested that the use of direct costing on the balance sheet would understand income because of the complete of the complete write-off fixed costs. Compute the effect on net income for 1972 of using direct costing to value the inventory as compared with full costing . Assuming that there is no change in work in process between the beginning and the end of the year , and that the fifo cost flow method is used . inventory , January 1, 1972 .. Variable costs.. .. Fixed costs (if inventory valued at full costs).... Units produced in 1972 ... 20,000 units $6.00 per unit $2.00 units 140,000

Total fixed costs ...... $280,000 units inventory , December 3 1, 1972 .. 25,000 units Variable costs.. .. $6.50 per unit (c) What is the effect on net income if the ending inventory consisted of only 10,000 units.