Question 1 (21 marks) Arch Inc ("Arch) is a retailer of electronic products in Hong Kong. It began operations in 2019. Part A (8 marks) The net realizable values presented below were estimated on 31 December 2019 and re-estimated on 31 January 2020. Cost Net Realizable Value 31 December 2019 $520,000 $485,000 31 January 2020 520,000 585,000 Required: Al. Prepare the journal entries required at 31 December 2019, and 31 January 2020, assuming that the inventory is recorded at LCNRV, using a perpetual inventory system and an allowance account under the cost-of-goods-sold method. (4 marks) A2. If the inventory is recorded at LCNRV, using a perpetual system and an allowance account under the loss method instead, will the method provide a higher or lower gross profit and net income in the year? (4 marks) Part B (5 marks) On 1 January 2020, Arch lent to a borrower in exchange for a 3-year promissory note. The note has a principal value of $600,000 and a maturity date of 31 December 2022. The note has a stated annual interest rate of 8% (coupon rate), with interest payable at the end of each year starting 31 December 2020. The market rate of interest for a note of similar risk is 10%. Requirement: B1. Calculate the present value of the promissory note on 1 January 2020 (rounded to the nearest dollars). (3 marks) B2. Prepare the journal entry to recognize the note on 1 January 2020. (2 marks) Part C (8 marks) The following transactions related to Arch took place in 2020. 1. On 15 February 2020, Arch sold some electronic products at a price of $50,000. The customer was given a cash discount of 3/20, n/60 (ignore cost of goods sold). Gross method is used to account for cash discount. 2. On 1 March 2020, the customer settled 20% of the price by paying $9,700 cash within the discount period. Requirement: Ci. Prepare Archs journal entry for each of the above transactions 1 - 2. (5 marks) C2. Arch currently prepares a set of monthly financial statements for the managers' operating decision-making. However, due to the amount of time required to check for the accuracy of the calculations and journal entries prepared, it takes more than 1 week's time before the monthly reports could be available for managers' use in the following month. To shorten the preparation time, Arch is considering if these checking procedures shall be skipped. What trade-offs, in terms of qualitative characteristics of useful information, are inherent in this case? (Note: Your answer shall cover two qualitative characteristics from fundamental and/or enhancing qualities) (3 marks) [Total for Question 1: 21 marks] Question 1 (21 marks) Arch Inc ("Arch) is a retailer of electronic products in Hong Kong. It began operations in 2019. Part A (8 marks) The net realizable values presented below were estimated on 31 December 2019 and re-estimated on 31 January 2020. Cost Net Realizable Value 31 December 2019 $520,000 $485,000 31 January 2020 520,000 585,000 Required: Al. Prepare the journal entries required at 31 December 2019, and 31 January 2020, assuming that the inventory is recorded at LCNRV, using a perpetual inventory system and an allowance account under the cost-of-goods-sold method. (4 marks) A2. If the inventory is recorded at LCNRV, using a perpetual system and an allowance account under the loss method instead, will the method provide a higher or lower gross profit and net income in the year? (4 marks) Part B (5 marks) On 1 January 2020, Arch lent to a borrower in exchange for a 3-year promissory note. The note has a principal value of $600,000 and a maturity date of 31 December 2022. The note has a stated annual interest rate of 8% (coupon rate), with interest payable at the end of each year starting 31 December 2020. The market rate of interest for a note of similar risk is 10%. Requirement: B1. Calculate the present value of the promissory note on 1 January 2020 (rounded to the nearest dollars). (3 marks) B2. Prepare the journal entry to recognize the note on 1 January 2020. (2 marks) Part C (8 marks) The following transactions related to Arch took place in 2020. 1. On 15 February 2020, Arch sold some electronic products at a price of $50,000. The customer was given a cash discount of 3/20, n/60 (ignore cost of goods sold). Gross method is used to account for cash discount. 2. On 1 March 2020, the customer settled 20% of the price by paying $9,700 cash within the discount period. Requirement: Ci. Prepare Archs journal entry for each of the above transactions 1 - 2. (5 marks) C2. Arch currently prepares a set of monthly financial statements for the managers' operating decision-making. However, due to the amount of time required to check for the accuracy of the calculations and journal entries prepared, it takes more than 1 week's time before the monthly reports could be available for managers' use in the following month. To shorten the preparation time, Arch is considering if these checking procedures shall be skipped. What trade-offs, in terms of qualitative characteristics of useful information, are inherent in this case? (Note: Your answer shall cover two qualitative characteristics from fundamental and/or enhancing qualities) (3 marks) [Total for Question 1: 21 marks]
