Question 2 Johanna and Jake Berkvom own Campus Fashions. From its inception Campus Fashions has sold goods on either a cash or…

Question 2
Johanna and Jake Berkvom own Campus Fashions. From its inception Campus
Fashions has sold goods on either a cash or credit basis, but no credit cards have
been accepted. During the past several months, the Berkvoms have begun to
question their credit sales policies. First, they have lost some sales because of their
refusal to accept credit cards. Second, representatives of two banks have
convinced them to accept their credit cards. One bank, City Bank, has stated that
(1) its credit card fee is 4% and (2) it pays the retailer 96 cents on each $1 of sales
within 3 days of receiving the credit card billings.
The Berkvoms decide that they should determine the cost of carrying their own
credit sales. From the accounting records of the past 3 years they accumulate
these data:
2015 2014 2013
Net credit sales $600 000 $720 000 $480 000
Collection agency fees for slowpaying
customers
2 940 3 000 1 920
Wages of part-time accounts
receivable clerk
4 560 4 560 4 560
Credit and collection expenses as a percentage of net credit sales are as follows:
uncollectable accounts 1.6%, invoicing and mailing costs 0.5%, and credit
investigation fee on new customers 0.15%.
Johanna and Jake also determine that the average accounts receivable balance
outstanding during the year is 5% of net credit sales. The Berkvoms estimate that
they could earn an average of 10% annually on cash invested in other business
opportunities.
Required
Answer the following:
(a) Present calculations for each year showing total credit and collection
expenses in dollars and as a percentage of net credit sales.
(b) Determine the net credit and collection expenses in dollars and as a
percentage of sales after considering the revenue not earned from other
investment opportunities. (Note: The interest revenue lost on the cash held
by the bank for 3 days is considered to be immaterial.)
(c) Discuss both the financial and non-financial factors that are relevant to the
decision.
Question 3
On 1 July 2012, Engineering Ltd purchased land $1 200 000 and buildings $500 000.
The estimated useful life of the buildings was 40 years, with a residual value of nil.
On 1 October 2012 machinery was purchased at a total cost of $120 000. The
estimated useful life of the machinery was 4 years with an estimated residual value
of $9000. Engineering Ltd uses straight-line depreciation for buildings and the
diminishing-balance method for machinery. The entity’s reporting period ends on 30
June.
Required
(a) Prepare journal entries to record the purchase of the land, buildings and
machinery during the year.
(b) Prepare journal entries to record the depreciation expense for the year ended
30 June 2013.
(c) Assume that on 1 July 2013 the entity revalued the land upwards by $200 000
and the buildings downwards by $25 000. Prepare the journal entries for the
revaluations.
(d) On 31 December 2013, owing to a change in product mix, the machinery was
sold for $50 000. Prepare the journal entry(ies) to dispose of the machinery.
Question 4
The intangible assets information of Elmo Ltd as at 31 December 2013 is
presented here:
Patent ($80 000 cost less $8000 amortisation) $ 72 000
Copyright ($64 000 cost less $25 600 amortisation) 38 400
Total $110 400
The patent was acquired in January 2013 and has a useful life of 10 years. The
copyright was acquired in January 2010 and also has a useful life of 10 years.
The following cash transactions may have affected intangible assets during 2014:
Jan. 2 Paid $13 500 legal costs to successfully defend
the patent against infringement by another
company.
Jan. – June Developed a new product, incurring $180 000 in
development costs.
A patent was granted for the product on 1 July,
and its useful life is equal to its legal life.
Sept. 1 Paid $45 000 to a footballer to appear in
commercials advertising the entity’s products. The
commercials will air in September and October.
Oct. 1 Acquired a copyright for $200 000. The copyright
has a useful life of 50 years.
Required
(a) Prepare journal entries to record the transactions.
(b) Prepare journal entries to record the 2014 amortisation expense for
intangible assets.
(c) Calculate the carrying amount of the intangible assets reported in the
statement of financial position at 31 December 2014.
(d) Prepare the note to the financial statements on Elmo Ltd’s intangible
assets as of 31 December 2014.