Question

SECTION A: FINANCIAL ACCOUNTING

Question 1
Houston House (Pty) Ltd and Whitney Holdings are competitors in the same industry.
The following information was summarised from a recent annual report of Houston House (Pty) Ltd
(In millions)
Receivables:
December 31, 2015                      R 1,968
December 31, 2014                            642
Revenue for the year ended:
December 31, 2015                      46,980
December 31, 2014                      40,023
The following information was summarised from a recent annual report of Whitney Holdings:
(In millions)
Accounts and notes receivable, net
December 31, 2015                     R 246
December 31, 2014                        264
Revenues for the year ended:
December 31, 2015                     4,335
December 31, 2014                     4,251

Required:
1. Calculate the accounts receivable turnover ratios for Houston House and Whitney Holdings for the most recent year.
2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on the reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing?

Question 2                                                                
Phoenix Photography Company experienced a sharp decrease in Net Income during the year 2016. Madea Perry, the owner of the company, anticipates a need for a Bank loan in the year 2017. Late in 2016, Perry instructed Reunion Mann, the accountant, and friend of his to record a R10, 000 sale of portraits to the Perry family even though the photos will not be shot until January 2017. Perry told Reunion not to make the following December 31 2016 adjusting entries
Salaries owed to employees R 20000
Prepaid insurance that has expired 2000

Required:
1. Compute the overall effect of these transactions on the company’s reported income for 2016. Is the reported net income overstated or understated.
2. Why did Madea take these actions? Are they ethical? Give your reason, identifying the parties that benefitted and those that were harmed by Madea’s actions.
Use the ethical decision making model which factor (economic, legal or ethical) seems to be taking precedence? Identify the stakeholders and potential consequences to each.
3) As a personal friend of Perry’s, what advice would you give to him?

Question 3                                                                                     
You are Chief Financial Officer for Alpha Resorts. You are reviewing the following transactions:

1. Adding a new patio deck to the resort’s upscale restaurant, R180, 000

2. Painting the ocean side beach houses, R75, 000

3. Purchasing additional golf carts, R25, 000

4. Rebuilding the engine in the resort’s airport shuttle bus, R10, 000

5. Replacing the old air conditioning unit in the golf shop with a more efficient one, R20, 000 Your accountant has capitalized all of these items and intends to depreciate them over the appropriate asset’s remaining useful life as originally estimated.

Indicate whether you agree or disagree with your accountant’s treatment of each item. In those cases where you disagree, state the proper treatment of that expenditure. Use the following table:

Expenditure	Agree or Disagree?	Proper Treatment, if Disagree
1. Adding a new patio deck to the resort’s ocean side bar, R180,000
2. Painting 10 ocean front beach houses, R75,000
3. Purchasing additional golf carts for the club house, R25,000
4. Rebuilding the engine in the resort’s airport shuttle bus, R10,000
5. Replacing the pro shop’s old air conditioning unit with a more efficient one, R20,000

Question 4 [15 marks]
Lunar Company (Pty) Ltd‘s balance sheets for the last two years are provided below

Balance Sheets                   2013                     2012
Cash                             R 82,000               R 40,000
Accounts Receivable        180,000                150,000
Inventory                          170,000                200,000
Equipment                       200,000                140,000
Accum. Depreciation        (72,000)                (60,000)
Total Assets                   R560,000             R470,000
Accounts Payable           R100,000             R 80,000
L/T Notes Payable             100,000                50,000
Ordinary Shares                250,000              250,000

Retained Earnings             110,000                90,000
Total Liabilities &
Shareholders’ Equity        R560,000            R470,000

The company’s income statement for 2013 is provided below:

Income Statement                     2013
Sales                                     R345,000
Expenses:
Cost of Goods Sold                 R120,000
Operating Expenses                    58,000
Depreciation Expense                  20,000
Interest Expense                           2,000
                                                200,000
Operating Income                       145,000
Gain on Sale--Equipment*              5,000
Income before Taxes                  150,000
Tax Expense                               30,000
Net Income                              R120,000

*The company sold equipment for R57, 000 that had a cost of R60, 000

Required:
Prepare the company’s Statement of Cash flows for 2013. Use the direct method of computing cash flows from operating activities.

Answer 1