QUESTION 1 (10 Marks)
The following financial statements were prepared for the management of Morgan Ltd. The statements contain some information that will be disclosed in note form in the general purpose external financial statements to be issued to the investors.
Morgan Ltd
Income Statement
For the year ended 30 June 2018
Revenues (Note 2) $850,500
Expenses, excluding finance costs (Note 4) 686,700
Finance costs 6,300
-------------
Profit before income tax 157,500
Income tax expense 63,000
-------------
Profit $ 94,500
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Morgan Ltd
Statement of Financial Position
As at 30 June 2018
Current assets
Cash and cash equivalents $ 37,800
Accounts receivables $299,250
Less: Allowance for doubtful debts 18,900
--------------
280,350
Inventories 252,000
_______
Total current assets
570,150
_______
Non-current assets
Land 63,000
Building $189,000
Less: Accumulated Depreciation 37,800
_________ 151,200
Store equipment 47,250
Less: Accumulated Depreciation 22,050
_________ 25,200
_______
Total Non-current assets
239,400
_______
Total assets
809,550
=======
Current liabilities
Accounts payables 270,900
Preference dividends payable 3,780
Ordinary dividends payable 25,200
Other current liabilities 12,600
_______
Total current liabilities
312,480
_______
Non-current liabilities
Long-term borrowings (Note 5) 63,000
_______
Total Non-current liabilities
63,000
_______
Total liabilities
375,480
_______
Net assets
434,070
=======
Equity
Share capital $315,000
Retained earnings 119,070
_______
Total equity
434,070
=======
Morgan Ltd
Statement of Changes in Equity
For the year ended 30 June 2018
Share capital
Ordinary:
Balance at start of period $252,000
________
Balance at end of period 252,000
________
Preference (Note 6):
Balance at start of period 63,000
_______
Balance at end of period 63,000
________
Total share capital $315,000
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Retained earnings
Balance at start of period $53,550
Total profit for the period 94,500
Dividends – preferences (3,780)
Dividends – ordinary (25,200)
________
Balance at end of period $119,070
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Notes to the financial statements
Note 2: Revenue
Sales $850,500
Note 4: Expenses
Cost of sales 567,000
Selling and distribution expenses 89,000
Administration expenses 30,700
Note 5: Long-term borrowings
10% mortgage payable 63,000
Note 6: Preference shares
6% preference shares 63,000
Additional information:
1. The balance of certain accounts at the beginning of the year are:
Accounts receivables $315,000
Allowance for doubtful debts (26,350)
Inventories 220,500
2. Total assets and total equity at the beginning of the year were $756,000 and $368,550 respectfully.
REQUIRED:
A. Name the ratios that a financial analyst might calculate to give some indication of the following cases: (2 Marks)
1. A company’s earning power
2. The extent to which internal resources have been used to finance acquisition of assets
3. Rapidity with which accounts receivables are collected
4. The ability of the entity’s earnings to cover its interest commitments
5. The length of time taken by the business to sell its inventories
B. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases. (6 Marks)
C. Given the above financial statements, comment on the company’s profitability and liquidity. (2 Marks)
QUESTION 2 (10 Marks)
Koala Bear Day-care provides day-care for children from Mondays through Fridays. Its monthly variable costs per child are:
Lunch $100
Educational supplies 75
Other supplies (paper products, toiletries, etc.) 25
____________
Total $200
============
Monthly fixed costs consist of:
Rent $2,000
Utilities (electricity, water, telephone expenses) 300
Insurance 300
Salaries 2,500
Miscellaneous 500
_________
Total $5,600
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Koala Bear charges each parent $600 per child.
REQUIRED:
A. Calculate the break-even point. (2 Marks)
B. Koala Bear’s target profit is $10,400 per month, calculate the number of children who must be enrolled to achieve the target profit (2 Marks)
C. Koala Bear lost its lease and had to move to another building. Monthly rent for the new building is $3,000. At the suggestion of parents, Koala Bear plans to take children on field trips. Monthly costs of the field trips are $1,000. By how much should Koala Bear increase fees per child to meet the target profit of $10,400, assuming the same number of children as in requirement B? (3 Marks)
D. How can a company with multiple products calculate its break-even point? Discuss and support your discussion by readings and research. (3 Marks)
QUESTION 3 (10 Marks)
Lennox Company uses a job costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labour cost. At the beginning of 2018, the company’s management has made the following estimates for the year:
Department A Department B
Direct labour-hours 15,000 30,000
Machine-hours 50,000 12,000
Direct labour cost $80,000 $172,000
Manufacturing overhead 162,500 215,000
Job 145 was initiated into production on August 1 and completed on September 15. The company’s cost records show the following information on the job:
Department A Department B
Direct labour-hours 22 40
Machine-hours 80 20
Direct material used $450 $250
Direct labour cost 120 180
REQUIRED:
A. Calculate the predetermined overhead rates that should be used during 2014 in Department A and B. (2 Marks)
- Calculate the total overhead cost applied to job 145. (2 Marks)
- What would be the total cost of job 145? If the job contained 10 units, what would be the cost per unit? (2 Marks)
- What factors should be considered in selecting a base to be used in calculating the overhead absorption or recovery rates? Discuss. Your discussion should be supported by readings and research. (4 Marks)