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Basic Accounting

6HSWHPEHU

1. Time allowed : Three (3) hours

2. Total number of questions : Five (5) questions

3. Number of questions to be answered : All five (5) questions

4. Show details of workings where appropriate. Silent, non-programmable calculators may be

used.

5. Mathematical tables are provided in this question paper.

6. Begin each answer to a new question on a fresh page.

7. Answer all questions in English.

ANSWER ALL FIVE (5) QUESTIONS
1. The following trial balance was taken from the books of Atika Enterprise Sdn Bhd:

TRIAL BALANCE AS AT 30 JUNE 2006

DR CR
Item
RM’000 RM’000

Revenue 10,652
Cost of goods sold 7,441
Interest on term loan 69
Auditors’ remuneration 45
Depreciation 147
Directors’ remuneration 318
Administration, selling and distribution costs 1,567
Taxation 101
Provision for taxation 133
Freehold premises, at cost 1,230
Fixtures and fittings, at cost 643
Motor vehicles, at cost 455
Accumulated depreciation as at 30 June 2006:
- Fixtures and fittings 235
- Motor vehicles 226
Inventories as at 30 June 2006 1,177
Trade debtors and creditors 2,660 1,343
Prepayment and accruals 404 293
Deposit with a licensed financial institution 267
Bank overdraft 150
Provision for doubtful debts 243
Issued and paid-up share capital:
- Ordinary shares 1,800
- 8% preference shares 200
Term loan (10%) 920
Share premium 63
Retained earnings as at 1 July 2005 266

16,524 16,524

Page 2 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 Additional information available as at 30 June 2006:

x Insurance premium of RM36,000 is included as part of the administration, selling and

distribution costs. The insurance premium is for a one-year period to 30 September 2006.

x Outstanding telephone and utility bills were RM2,400 and RM2,600 respectively. The above
expenses were not included as part of the administration, selling and distribution costs.

x The provision for doubtful debts is to be adjusted to 5% of the total trade debtors’ balance.

x During the financial year, the premises was re-valued upwards to RM2,313,000.

x Authorised share capital include:

- 4,000,000 ordinary shares of RM0.50 each.

- 350,000 8% non-cumulative preference shares of RM1.00 each.

x Term loan is for a period of three years from 1 January 2005 to 31 December 2007. Interest is
payable on a quarterly basis. Interest for the last quarter of the financial year ended 30 June
2006 was not accrued for in the accounts.

x The Directors proposed payment of the final dividend for preference shares for the year, and a
final dividend of 3 sen for each ordinary share.

Required:

Prepare the following for Atika Enterprise Sdn Bhd:

(a) Profit and Loss Account for the financial year ended 30 June 2006. [10]

(b) Balance Sheet as at 30 June 2006. [15]

(Total:25 marks)

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 3 of 17

2. (a) The July 2006 bank statement of Magumi Sdn Bhd (“Magumi”) shows a credit balance of
RM6,100.57. However, its ledger shows a bank balance of RM6,263.57. Magumi’s Accounts
Executive has identified the following reconciling items:

x A cash deposit of RM1,410.90 was made after banking hours on 31 July 2006 via the
automated teller machine.

x The following four cheques were issued in July 2006 and have not been paid by the
bank yet:

Cheque No. Date of Issue Amount (RM)

282803 10 July 100.00

282811 23 July 10.25

282817 28 July 205.00

282819 30 July 402.50

x The following credit memorandum was included in the bank statement:

Date Amount (RM) Explanation

Magumi’s tenant directly banked-in a
29 July 2006 500.00 cheque being payment for August 2006
rental.

x The following two debit memorandums were also included in the bank statement:

Date Amount (RM) Explanation

Cheque for Kagumi Sdn Bhd was wrongly
18 July 2006 50.25
credited into Magumi’s bank balance.
Service charge by the bank for the month
31 July 2006 20.00
of July 2006.

Required:

Prepare the following:

(i) Adjusted bank account in Magumi’s ledger. [3]

(ii) Bank reconciliation for the month ended 31 July 2006. [5]

Page 4 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 (b) Mikimoto (M) Sdn Bhd (“Mikimoto”), a construction company, commenced business on 1
January 2003. During the three years until 31 December 2005, Mikimoto bought and sold the
following motor vehicles for use in business:

Date of Vehicle Date of Disposal

Cost (RM)
Purchase Registration No. Disposal Proceeds (RM)
1 July 2003 WGM 2044 62,000 13 Feb 2005 28,000

5 May 2004 WJK 2044 68,000 - -

12 Nov 2005 WNW 2044 72,000 - -

All Mikimoto’s motor vehicles are depreciated at the rate of 25% per annum on a reducing
balance method with no residual value. A full-year depreciation is provided for motor vehicles
bought during the year and no depreciation is provided in the year of disposal.

Required:

Prepare the following accounts for Mikimoto for the period from 1 January 2003 to
31 December 2005:

(i) Motor vehicles account [4]

(ii) Provision for depreciation of motor vehicles account [5]

(iii) Motor vehicles disposal account [4]

(Total:21 marks)

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 5 of 17

3. For each of the following questions, choose the correct answer (A, B, C or D):

(a) It is important to distinguish between revenue and capital expenditure.

This distinction must be made when:

A. performing investment appraisal calculations.

B. preparing cash budgets.
C. preparing sales ledger.
D. preparing profit and loss accounts. [2]

(b) Which of the following should be treated as revenue expenditure of a factory?

A. Purchase of a power generator.

B. Installation cost of a power generator.
C. Legal fee for debt collection.
D. Legal fee incurred in the purchase of a landed property. [2]

(c) Which accounting convention is observed when plant and machinery under financial lease is
shown in the balance sheet?

A. Accruals.
B. Materiality.
C. Substance over form.
D. Prudence. [2]

(d) The current ratio of a company increases from 1.6 to 2.3.

Which of the following would explain this movement?

A. Giving of cash discounts to customers.

B. Giving of better credit terms to customers.
C. Issuing of new shares for cash.
D. Purchasing of a new plant and machinery. [2]

(e) Which of the following accounting principles BEST describes the provision of doubtful debts on
accounts receivable?

A. Realisation.
B. Matching.
C. Conservatism.
D. Cost. [2]

(f) A business made further provision for stock obsolescence by RM2,000.

What will the effect of this adjustment on the final accounts be?

Net Profit Net Inventories

A. Decrease by RM2,000 Decrease by RM2,000
B. Decrease by RM2,000 Increase by RM2,000
C. Increase by RM2,000 Decrease by RM2,000
D. Increase by RM2,000 Increase by RM2,000 [2]

(g) An outstanding TMnet bill of RM234 was treated as a prepayment in preparing Lnux Sdn Bhd’s
profit and loss account.

What will the effect of this action on the company’s profit be?

A. Overstated by RM234.
B. Overstated by RM468.
C. Understated by RM234.
D. Understated by RM468. [2]

Page 6 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 (h) Which of the following is usually the least important as a measure of short-term liquidity?

A. Cash flow from operating activities.

B. Quick ratio.
C. Current ratio.
D. Debt ratio. [2]

(i) Which of the following is an example of capital expenditure?

A. Payment of utility bills.

B. Payment of directors’ leave passage.
C. Purchase of stock.
D. Purchase of a brand name. [2]

(j) The concept of materiality:

A. requires that financial statements are accurate to the nearest Ringgit, but need not
show sen.
B. is based upon what users of financial statements consider important.
C. permits accountants to use the easiest and most convenient means of accounting for
events that are immaterial.
D. permits accountants to ignore other generally accepted accounting principles in
certain situations. [2]
(Total:20 marks)

4. (a) Mr Mc Kinsley has engaged a financial institution to set up a private trust fund for his Down
Syndrome son, John. John will be 12 years old on 1 November 2006.

Mr Mc Kinsley wishes to have a fund size of RM1million for John on his 20th birthday (i.e. 1
November 2014). Mr Mc Kinsley has informed the trust fund manager that he would like to
make a lump sum contribution to the trust fund on John’s 12th birthday.

Assuming the trust fund manager is confident to earn Mr Mc Kinsley a 12% return on his funds,
what should Mr Mc Kinsley’s initial contribution be? [6]

(b) Instead of making a lump sum payment as mentioned in (a) above, Mr Mc Kinsley is also
considering the option of making half yearly instalments of RM60,000 per instalment.

Assuming the financial institution can earn the same rate of return for Mr Mc Kinsley, what
would the fund size on John’s 20th birthday be? [6]
(Total:12 marks)

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 7 of 17

5. The following information was furnished to you by the Board of Directors of Taiyo Sdn Bhd (“Taiyo”).

DRAFT TRADING, PROFIT AND LOSS ACCOUNT

FOR FINANCIAL YEAR ENDED 30 JUNE 2006

Item RM’000

Revenue 15,000
Less: Cost of sales
Opening stock 2,000
Add: Purchases 10,900
Less: Closing stock (2,400)

(10,500)

Gross profit 4,500

Less: Expenses
Administration expenses 1,050
Bad debts written-off 200
Discount allowed 50
Overdraft interest 150
Depreciation – machinery (10%) 350
Advertising and promotion expenses 900

Net profit 1,800

BALANCE SHEET AS AT 30 JUNE 2006

Item RM’000

Fixed assets – machinery (net book value) 3,150

Stock 2,400
Debtors 1,200

6,750

Ordinary shares (RM1.00 each) 2,250

Retained profits 1,600
8% long-term loan (2004 - 2008) 400
Bank overdraft 1,500
Creditors 1,000

6,750

Notes:

x Assuming one year has 350 business days.

x Round-up your answer to the nearest two decimal places.

Page 8 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 Required:

(a) Calculate the following financial ratios for Taiyo:

(i) Gross profit margin [1½]

(ii) Net profit margin [1½]

(iii) Current ratio [1½]

(iv) Acid test ratio [1½]

(v) Stock turnover (times) [2]

(vi) Average debtors’ collection period (days) [2]

(vii) Average creditors’ payment period (days) [2]

(viii) Return on total assets [2]

(b) Similar businesses to Taiyo have the following financial ratios:

Gross profit margin 35%

Net profit margin 15%
Current ratio 1.5 : 1
Acid test ratio 1:1
Stock turnover (times) 6 times
Average debtors’ collection period (days) 30 days
Average creditors’ payment period (days) 35 days
Return on total assets 30%

Compare and comment briefly on each of the ratios of Taiyo and that of the similar businesses.
[8]
(Total:22 marks)

- END OF QUESTION PAPER -

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 9 of 17

 OUTLINE ANSWERS
The comments given in the boxes below indicate the areas of weaknesses the examiners have identified
and their advice to future candidates.

Question 1
x No comments were provided for this question.

1. (a)
Atika Enterprise Sdn Bhd
Trading, Profit and Loss Account for the year ended 30 June 2006

RM’000 RM’000
Revenue 10,652
Less: Cost of sales (7,441)
Gross profit 3,211
Less : Expenses
Interest on term loan (69 + 23) 92
Directors’ remuneration 318
Auditors’ remuneration 45

Administration, selling and distribution costs (1567- 1,563

insurance prepaid 9 + tel & utilities accrued 5)
Depreciation 147 2,165
1,046
Add: Reduction in allowance for doubtful debts
110
(b/f243-c/f 2660*5%)

Net profit before taxation 1,156

Less: Taxation (101)
Net profit after taxation 1,055
Less: Proposed dividend
- Preference shares (200*8%) 16
- Ordinary dividend (3,600*RM0.03) 108 (124)

Profit for the year 931

Retained profit b/f 266
Retained profit c/f 1,197

Page 10 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

1. (b)
Atika Enterprise Sdn Bhd
Balance Sheet as at 30 June 2006

Cost/ Accumulated
NBV
revalued Depreciation
RM’000 RM’000 RM’000
Fixed assets
Freehold premises, at revaluation 2,313 - 2,313
Fixture and fittings 643 235 408
Motor vehicles 455 226 229
3,411 461 2,950
Current assets
Inventories 1,177
Trade debtors (2660 - 133) 2,527
Prepayment (404 + insurance prepaid 9) 413
Deposit with a licensed financial institution 267
4,384
Current liabilities
Trade creditors 1,343
Accruals
321
(293 + utilities 5 + interest on term loan accrued 23)
Provision for taxation 133
Proposed dividend (16 + 108) 124
Bank overdraft 150
2,071
Net current assets 2,313
5,263

Issued &
Financed by: Authorised fully paid-
up
Share capital - Ordinary shares 2,000 1,800
- Preference shares 350 200
2,350 2,000
Share premium 63
Revaluation reserves (2,313 - 1,230) 1,083
Retained revenue 1,197
4,343
Term loan (10%) 920
5,263

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 11 of 17

 Question 2
x Candidates showed poor understanding of fixed asset depreciation and disposal.

2 (a) (i)
Magumi Sdn Bhd
Bank Account (Adjusted)

2006 RM 2006 RM
31/7 Balance b/f 6263.57 31/7 Bank service charge 20.00
Aug’06 rental 500.00 31/7 Balance c/f 6743.57
received

6763.57 6763.57

(ii)
Bank Reconciliation

RM RM
Bank statement @ 31/7/2006 6,100.57
Add: Uncredited lodgement 1,410.90
7,511.47
Less: unpresented cheques
282803 100.00
282811 10.25
282817 205.00
282819 402.50 (717.75)
6,793.72
Less: Cheque for Kagumi wrongly credited (50.25)
Balance in the bank account (adjusted) 6,743.47

Page 12 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

2 (b) (i)
Mikimoto (M) Sdn Bhd
Motor Vehicles Account

2003 RM 2003 RM
1/7 WGM 2044 62,000 31/12 Bal c/f 62,000
62,000 62,000
2004 2004
1/1 Bal b/f 62,000
5/5 WJK 2044 68,000 31/12 Bal c/f 130,000
130,000 130,000
2005 2005
Bal b/f 130,000 13/2 Motor vehicle disposal 62,000
a/c
12/11 WNW 2044 72,000
Bal c/f 140,000
202,000 202,000

2 (b) (ii)
Provision for Depreciation of Motor Vehicles Account

2003 RM 2003 RM
31/12 Bal c/f 15,500 31/12 P&L 15,500
15,500 15,500
2004 2004
31/12 Bal c/f 44,125 1/1 Bal b/f 15,500
P&L 28,625
44,125 44,125
2005 2005
13/2 Disposal a/c 27,125 1/1 Balance b/f 44,125
31/12 Balance c/f 47,750 P&L 30,750
74,875 74,875

Motor Vehicles Disposal Account

2005 RM 2005 RM
13/2 Motor vehicle a/c 62,000 Provision for depreciation 27,125
Bank 28,000
31/12 P & L loss on disposal 6,875
62,000 62,000

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 13 of 17

 Workings:
(W1)

WGM 2044 WJK 2044 WNW 2044 Total

RM RM RM RM
Cost 62,000
Less: Depreciation (25%) (15,500) 15,500
NBV @31/12/2003 46,500 68,000
Less: Depreciation (11,625) (17,000) 28,625
NBV @31/12/2004 34,875 51,000 72,000
Less: Depreciation (12,750) (18,000) 30,750
NBV @31/12/2005 38,250 54,000

Accumulated Depreciation
27,125
@ 13/2/2005
31/12/2005 29,750 18,000

Question 3
x Candidates displayed poor knowledge of accounting concepts and conventions.

3. (a) D
(b) C
(c) C
(d) C
(e) A
(f) A
(g) B
(h) D
(i) D
(j) B

Page 14 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 Question 4
x No comments were provided for this question.

4. (a) The investment amount Mr Mc Kinsley should pay now in order to get RM1,000,000 in eight
years time based on an annual return of 12% is as follows:

FVn
PV =
(1+i)n
PV = FVn x PVIFi,n
= RM1,000,000 x PVIF 12%, 8 yrs
= RM1,000,000 x 0.404 = RM404,000

(b) The fund size on John’s 20th birthday will be as follows:

FVAn = PMT x FVIFA i,n

FVAn = RM60,000 x FVIFA 6%,16
= RM60,000 x 25.672 = RM 1,540,320

FVA: future value of n-year annuity

PMT: amount deposit annually or any regular time period

Question 5
x No comments were provided for this question.

5. (a)
(i) Gross profit margin = Gross profit x 100
Sales

= 4,500 x 100%
15,000

= 30%

(ii) Net profit margin = Net profit x 100

Sales

= 1,800 x 100%
15,000

= 12%

(iii) Current ratio = CA / CL

= (2,400 + 1,200)
(1,500 + 1,000)

= 1.44 :1

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 15 of 17

 (iv) Acid test ratio = (CA - Stock) / CL

= 1,200
(1,500 + 1,000)

= 0.48 : 1

(v) Stock turnover = Cost of Sales /Closing Stock

= 10,500
2,400

= 4.38 times
or

(v) Stock turnover = Cost of sales / average stock

= 10,500
½(2,000+2,400)

= 4.77 times

(vi) Average Debtors = trade debtors/sales * 350 days

collection period (days)
= 1,200 x 350 days
15,000

= 28 days

(vii) Average Creditors = trade creditors / purchases * 350 days

payment period (days)
= 1,000 x 350 days
10,900

= 32.11 days

(viii) ROTA = net income x 100

average total assets

= 1,800 x 100%
6,750

= 26.67%

Page 16 of 17 BFSC/COFSA September 2006 - CF04 Institut-Bank-Bank Malaysia

 (b) Profitability ratios

x Taiyo’s gross profit margin is 30%, which is lower than the industry average of 35%.

x Taiyo’s net profit margin is 12%, which is lower than the industry average of 15%.
This is in tandem with Taiyo’s lower gross profit margin as compared to those in the
same industry.

x Taiyo’s return on total assets is 26.67%, which is lower than the industry average of
30%. This reveals that for every Ringgit of investment in total assets, Taiyo is able to
generate 27 sen as opposed to 30 sen by others in the industry.

Liquidity ratios

x Current ratio of Taiyo is 1.44 times which is lower than the industry of 1.5 times.

x The acid test ratio of Taiyo of 0.48 times is sharply below the industry average of 1
time. This is due to a substantial portion of Taiyo’s current assets are tied down in
inventories.

Activity ratios

x Taiyo’s stock turnover of 4 times is sharply below the industry’s of 6 times. Taiyo
has to improve its inventory management in order to improve its activity ratio.

x Taiyo’s debtors’ collection period is 28 days which is slightly shorter than 30 days as
practised by the industry.

x Taiyo’s creditors’ payment period is 32 days which is slightly shorter than 35 days as
practised by the industry.

Institut-Bank-Bank Malaysia BFSC/COFSA September 2006 - CF04 Page 17 of 17