Emotion4 (10 marks) Ocean Pacic Limited sells split-type air conditioners through an intemet ordering system The company has undertaken the responsibility for installing air conditioners in customers' premises. Customers pay in advance for the air conditioners when placing their orders. The average length of time between the delivery and nal installation is 5 days. 80% of the sales invoice amount relates to the air conditioner and 20% to the installation service. Ocean Pacic's existing accounting policy is to recognize sales revenue only when the air conditioners had been successfully installed. The new Financial Controller of Ocean Pacic is proposing to change the accounting policy to recognize sales revenue when customers order and pay for the air conditioners. Required: Evaluate the impact of BOTH the existing and the proposed new accounting policy for recognizing the sales revenue as mentioned above, and advise if they are CORRECT or not to comply with the relevant accounting principles and concepts for revenue recognition. [within 300 words] (10 marks) M (35 marks) The following information as at the year-end date is extracted from the Freddy Corporation's nancial statements: December 31 2019!$) 20181$1 Cash 95,000 27,000 Accounts receivable 92,000 80,000 Allowance for doubtful accounts (4,500) (3,100) Inventory 155,000 175,000 Prepaid expenses 7,500 6,800 Land 90,000 60,000 Buildings 28 7,000 244,000 Buildings - Accumulated depreciation (32,000) (13,000) Machinery 50,000 60,000 Machinery- Accumulated depreciation (3 0,000) (25,000) Leased equipment* 28,594 - Leased equipment - Accumulated depreciation (9,531) - 222.99; 911, 2!!!! Accounts payable 90,000 84,000 Accrued liabilities 54,000 63,000 Lease payable 18,594 - Interest payable 930 - Bonds payable 125,000 60,000 Share capital-ordinary 100,000 92,000 Retained earnings 340,539 312,700 Z2236; 611, Q!!! For the year 2019 Net income $47,839 Depreciation expense - Buildings 19,000 Depreciation expense - Machinery 5,000 Depreciation expense - Leased equipment 9,531 Cash dividends declared and paid 20,000 Gain or loss on sale of Machinery None Additional information: * On 1 January 2019, Freddy leased an equipment, with an economic useful life of ten years, from Flower Company for three years. The present value of the minimum lease payment and the fair value of the leased equipment were $28,594 and $95,313 respectively. Annual lease payment of $10,000 has to be made at the beginning of each period. The lease agreement offers Freddy an option of purchasing the leased equipment at $1 at the end of the lease period. Question 3 (cont.) Required: (a) With reference to each of the five classification criteria, discuss why the leased equipment should be classified as the "finance lease", instead of the "operating lease", in the books of Freddy. [within 200 words] (6 marks) (b) Prepare a Statement of Cash Flows for the year ended 31 December 2019 for Freddy Corporation using the indirect method (assuming dividends and interest paid are classified as financing activities). (24 marks) (c) Goods, which costs $1,500, were not included in the physical count of inventory by Freddy. They were shipped from a supplier FOB shipping point on 29 December 2019, and did not arrive until 3 January 2020. Assuming that the purchase was properly recorded while the omission of the inventory could only be discovered after the 2019 financial statements were issued, analyze the effect (over/understate) of this omission on 2019 costs of goods sold, net income and retained earnings, and 1i. prepare the adjusting entries accordingly