Reference no: EM132596370

Exercise 1

Silver Quest Inc. buys and sells silver powder. Its financial year runs from January 1 until December 31. The balance sheet onJanuary 1, 2019 is as follows:

 

ASSETS		LIABILITIES
Buildings at cost	4,000,000	Long term debt	1,200,000
Accumulated depreciation	1,750,000	Capital lease obligation	799,200
Bookvalue buildings	2,250,000	Accounts payable	450,000
Capital lease equipment at cost	847,500	Salariespayable	48,000
Accumulateddepreciation	169,500	Interest payable	30,000
Bookvalue lease equipment	678,000	Taxespayable	10,000
Trucks at cost	2,500.000	EQUITY
Accumulateddepreciation	1,075,000	Common stock	2,250,000
Bookvalue trucks	1,425,000	Additional paid in capital	510,000
Merchandiseinventory	1,170,000	Paid in capital treasury stock	3,000
Accounts receivable	900,000	Retained earnings	2,332,800
Cash	1,210,000
Total	7,633,000	Total	7,633,000

The following additional information is availablefor 2019.
Silver Quest Inc is a private limited corporation. The shares of a private company are limited transferable. When a shareholder want to sell the shares he has to offer his shares to another shareholder first. Mr Johnson owns 2,500 sharesand wants to sell his shares. Because no suitable shareholder could be found, Silver Quest buys the shares on March 1, 2019 and decides to retire these shares. The purchase price of these shares is € 200 per share. The original issue price of theseshares was € 120 per share. The par value of a share is € 100.
Silver Quest Inc pays a dividend on July 1, 2019. The amount of the dividend is 40% of common stock.

Silver Quest Inc uses the double declining balance method to depreciate on the capitalleaseequipment. The depreciation rate is 20%. The interest rate implied in the capital lease contract is 12% per year. The lease started at January 1, 2018.
Silver Quest repays the long termdebt on July 1 every year. On this date, Silver Quest also pays the interest. The interest of the long term debt is 5% per year.

One of buildings was sold in 2019. The selling price was € 720,000. The bookgain on this disposal was € 30,000. The original purchase price of the building was € 1,200,000.

All sales and purchases are on account.

The income tax rate is 25%. The tax base is profit before taxes.

The table below gives an overview of all receipts and expenditures of 2019.

 

RECEIPTS		EXPENDITURES
Payments from customers	5,200,000	Paymentstosuppliers	4,280,000
Disposal of building	720,000	Salaries paid	800,000
		Lease term paid	'150,000
		Interest paid on long term debt	..........
		Repayment of long term debt	150,000
		Dividendspaid	..........
		Purchase and retirement own shares	500,000
		Incometaxpaid	35,000

At the end of the period the following balance sheet items are given:

Capital lease equipment at cost                       € 847,500

Trucks at cost                                                  € 2,500,000

Accumulated depreciation trucks                   € 1,300,000

Merchandise inventory                                   € 1,560,000

Accounts receivables                                      € 1,100,000    

Accounts payable                                            € 380,000

Salaries payable                                               € 64,000

Paid in capital Treasury Stock                        € 3,000

Question A
Complete the table with receipts and expenditures.

Question B
Calculate salesof silver powder in 2019.

Question C1
Calculate purchases of silver powder in 2019.

Question C2
Calculate cost of goods sold of silver powder in 2019.

Question D
Prepare the journal entry regarding the purchase and retirement of the own shares on March 1, 2019.

Account name Debit Credit

Question E
Complete theincome statement of 2019. Please show your calculations explicitly.

 

EXPENSES		REVENUES
Cost of goods sold (question C2)	...........	Sales (question B)	...........
Depreciation expense building	110,000	Gain on disposal of building	30,000
Depreciation expense equipment	...........
Depreciation expense trucks	...........
Salariesexpense	...........
Interest expense long term debt	...........
Interest expense lease obligation	...........
<Profit beforetax>	...........
Incometaxexpense	...........
<Net income>	...........

Calculations:

Question F

Complete thebalance sheet on December 31, 2019. Please show your calculations explicitly.

 

ASSETS		LIABILITIES
Buildings at cost	...........	Long term debt	..........
Accumulated depreciation	...........	Capital lease obligation	..........
Bookvalue buildings	..........	Accounts payable	380,000
Capital lease equipment at cost	847,500	Salariespayable	64,000
Accumulateddepreciation	...........	Interest payable	..........
Bookvalue lease equipment	...........	Taxespayable	..........
Trucks at cost	2,500,000	EQUITY
Accumulateddepreciation	1,300,000	Common stock	..........
Bookvalue trucks	1,200,000	Additional paid in capital	..........
Merchandiseinventory	1,560,000	Paid in capital treasury stock	3,000
Accounts receivable	1,100,000	Retained earnings	..........
Cash	...........
Total		Total

Exercise 2:

Question A

Compute the depreciation expense on equipment for the year ended on June 30, 2019.

Question B

Prepare Babbel's statement of cash flows for the year ended June 30, 2019, using the indirect method Make a reconciliation with the change in cash.

Question C

Compute Cash flow to sales ratio. Shortly provide your interpretation of this ratio for Babbel Corporation.

Question D

Discuss why depreciation is deducted on the Income statement and added back to Cash flows?

Question E

Discuss why the change in Retained Earnings as part of stockholders' equity is not separately included in the cash flow from financing activities?

Attachment:- exam financial accounting.rar