Professional Documents
Culture Documents
(B)
Entries required $ Net Effects
(a) Debit: Debtors 800 No effect
Credit: Cash 800
During 2008, the company had received in advance $28,000 in respect of rent for January 2009; and at 31
December 2008, an amount of $12,000 was owed by a tenant.
In 2009, the company received from the tenants cheques amounting to $730,000 which included a refundable
rental deposit of $100,000 and rent in advance for 2010 of $32,000. A rental deposit of $55,000 was refunded to
a tenant in November 2009. At 31 December 2009, rentals from a tenant of $10,000 per month, which were due
on 16 November and 16 December 2009, remained unpaid.
During 2009, rates were paid by cheques quarterly on 1 January, 1 April, 1 July and 1 October. Details are as
follows:
$
3 months to 28 February 2009 1830
3 months to 31 May 2009 2160
3 months to 31 August 2009 2160
3 months to 30 November 2009 2160
8310
Rates amounting to $2,160 for the three months to 28 February 2010 has not yet been paid by the company as at
31 December 2009.
REQUIRED:
In the books of Viola Company, show the entries in the following accounts for the year ended 31 December 2009:
(B)
(a)
Rental income
2009 $ 2009 $
Jan 1 Accrued b/d 12,000 Jan 1 Prepaid b/d 28,000
Dec 31 Profit and loss 629,000 Bank ($730,000 - $100,000) 630,000
Dec 31 Prepaid c/d 32,000 Dec 31 Accrued c/d ($10,000 + $10,000 x 1/2) 15,000
673,000 673,000
(b)
Rates
2009 $ 2009 $
Jan 1 Bank 1,830 Jan 1 Prepaid b/d ($1,830 x 1/3) 610
Apr 1 Bank 2,160 Dec 31 Profit and loss 8,420
Jul 1 Bank 2,160
Oct 1 Bank 2,160
Dec 31 Accrued c/d ($2,160 x 1/3) 720
9,030 9,030
On 30 November 2008, the balance of petty cash was $1,037. The following transactions took place during the
month of December 2008:
December 1 Drew cash from the bank to restore to the imprest amount.
2 Paid newspaper subscriptions for December $135.
3 Bought postage stamps $400 and note pads $42.
8 Added $300 to messenger’s Octopus card for delivery of documents.
11 Reimbursed taxi fares $97.
15 Paid registered letter charges $122.
16 Refunded $294 to Carl Cheung, a customer, for an overpayment of his account in November
2008.
19 Bought ball pens and staplers $205.
22 Purchased paper cups and tissue rolls $76.
27 Bought magazines $163.
29 Paid speed post charges $210 and bus fare $8.
REQUIRED:
Draw up the petty cash book to record the above transactions for December 2008.
(B)
Petty Cash Book
Stationery Travelling Sundry Ledger
Receipt Date Particulars Total Postage Expenses Expenses Accounts
$ 2008 $ $ $ $ $ $
1,037 Dec 1 Balance b/d
1,963 " 1 Bank
2 Newspapers 135 135
" 3 Postage stamps and note pads 442 400 42
" 8 Octopus card 300 300
" 11 Taxi fares 97 97
" 15 Registered letters 122 122
" 16 Carl Cheung 294 294
" 19 Ball pens and staplers 205 205
" 22 Paper cups and tissue rolls 76 76
" 27 Magazines 163 163
" 29 Speed post charges and bus fare 218 210 8
2,052 732 247 405 374 294
31 Balance c/d 948
3,000 3,000
(c) What are the types of accounting errors that will not be revealed by a trial balance? State four of them.
(B)
Net profit for the year ended 31 March 2007 Working capital as at 31 March 2007
(a) Increase Increase
(b) No change No change
(c) Decrease Decrease
(d) No change Decrease
HKCEE (2006, 3) (Basic Accounting)
(A) Given below is a list of accounting terminology:
(1) Accounting equation
(2) Adjusting entries
(3) Closing entries
(4) Correct entries
(5) Discount received
(6) Double entry accounting
(7) Factory overheads
(8) General journal
(9) Liabilities
(10) Postings
(11) Raw materials
(12) Sales journal
(13) Trade discount
(14) Trade balance
Select from (1) to (14) above an appropriate accounting term that best fits each of the definitions/descriptions
below:
Accounting
Definitions/descriptions terminology
Example: Obligations of a firm to transfer assets to other firms as a result of past transactions. 9
(a) A book of original entry in which credit sales of fixed assets are recorded. ?
(b) A deduction from list price upon the purchase of goods ?
(c) A major component of ‘prime cost’. ?
A list of all ledger balances as at a particular date for checking the arithmetic
(d) accuracy of accounting entries. ?
(e) Business transactions recorded with equal amount of debits and credits. ?
Entries made at the end of an accounting period to update expenses, revenue, assets
(f) or liability accounts on an accrual accounting basis. ?
Entries made to transfer the balances of nominal accounts to the profit and loss
(g) account. ?
The process of transferring accounting data from the books of original entry to
(h) ledger accounts. ?
(B) On 1 January 2006, ABC Ltd found that its closing stock had been overstated by $80,000 at 31 December 2004 and
$70,000 at 31 December 2005.
(A)
Accounting terminology
(a) (8) General journal
(b) (13) Trade discount
(c) (11) Raw materials
(d) (14) Trade balance
(e) (6) Double entry accounting
(f) (2) Adjusting entries
(g) (3) Closing entries
(h) (10) Postings
(B)
(a) Net profit for the year ended 31 December 2004 – overstated by $80,000
(b) Net profit for the year ended 31 December 2005 – understated by $10,000
(c) Retained profit as at 31 December 2005 – overstated by $70,000
(B) The steps in the accounting cycle are performed in sequence in each accounting period. Some of the steps of the
accounting cycle are shown below:
During 2008, the company had received in advance $28,000 in respect of rent for January 2009; and at 31
December 2008, an amount of $12,000 was owed by a tenant.
In 2009, the company received from the tenants cheques amounting to $730,000 which included a refundable
rental deposit of $100,000 and rent in advance for 2010 of $32,000. A rental deposit of $55,000 was refunded to
a tenant in November 2009. At 31 December 2009, rentals from a tenant of $10,000 per month, which were due
on 16 November and 16 December 2009, remained unpaid.
During 2009, rates were paid by cheques quarterly on 1 January, 1 April, 1 July and 1 October. Details are as
follows:
$
3 months to 28 February 2009 1830
3 months to 31 May 2009 2160
3 months to 31 August 2009 2160
3 months to 30 November 2009 2160
8310
Rates amounting to $2,160 for the three months to 28 February 2010 has not yet been paid by the company as at
31 December 2009.
REQUIRED:
In the books of Viola Company, show the entries in the following accounts for the year ended 31 December 2009:
(a) the rental income account; and
(b) the rates account.
(a)
Rental income
2009 $ 2009 $
Jan 1 Accrued b/d 12,000 Jan 1 Prepaid b/d 28,000
Dec 31 Profit and loss 629,000 Bank ($730,000 - $100,000) 630,000
Dec 31 Prepaid c/d 32,000 Dec 31 Accrued c/d ($10,000 + $10,000 x 1/2) 15,000
673,000 673,000
(b)
Rates
2009 $ 2009 $
Jan 1 Bank 1,830 Jan 1 Accrued b/d ($1,830 x 1/3) 610
Apr 1 Bank 2,160 Dec 31 Profit and loss 8,420
Jul 1 Bank 2,160
Oct 1 Bank 2,160
Dec 31 Accrued c/d ($2,160 x 1/3) 720
9,030 9,030
(a)
Leo Lee
Trial balance as at 31 March 2005
$ $
Agency commission revenue 206,040
Office equipment 79,790
Bank overdraft 13,450
Sales staff salaries 24,890
Sales staff bonus 101,230
Agency commission revenue in advance 11,180
Administrative expenses 46,830
Agency commission revenue in arrears 29,080
Printing of forms and leaflets 4,600
Capital 25,000
Drawings 5,000
Provision for depreciation – office equipment 49,850
Electricity deposit 8,500
Prepaid administrative expenses 5,600
305,520 305,520
(b)
Leo Lee
Profit and loss account for the year ended 31 March 2005
$ $
Agency commission revenue 206,040
Less Expenses
Sales staff salaries 24,890
Sales staff bonus 101,230
Administrative expenses 46,830
Printing of forms and leaflets 4,600 177,550
Net profit 28,490
(c)
Leo Lee
Balance sheet as at 31 March 2005
$ $ $
Fixed assets
Office equipment 79,790
Less: Provision for depreciation 49,850
29,940
Current assets
Electricity deposit 8,500
Agency commission revenue in arrears 29,080
Prepaid administrative expenses 5,600
43,180
Less Current Liabilities
Agency commission revenue in advance 11,180
Bank overdraft 13,450 24,630
Working capital 18,550
48,490
Financed by:
Capital, 1 April 2004 25,000
Add: Net profit for the year 28,490
53,490
Less: Drawings 5,000
48,490
Accrual and Prepayment
Longman Question 13 (Accrual and Prepayment)
(a)
Telephone
2014 $ 2014 $
Mar 31 Balance b/d 12,355 Mar 31 Profit and loss 12,905
“ 31 Accrued c/d 550
12,905 12,905
Apr 1 Accrued b/d 550
Rental Income
2014 $ 2014 $
Mar 31 Profit and loss 41,600 Mar 31 Balance b/d 36,000
“ 31 Accrued c/d ($8,400 × 2/3) 5,600
41,600 41,600
Apr 1 Accrued b/d 5,600
(b)
Mr Ko
Statement of Financial Position as at 31 March 2014 (extract)
$ $
Current assets Current liabilities
Prepaid expenses 8,600 Accrued expenses 550
Accrued revenue (13,500 + 5,600) 19,100
Rent Expense
2013 $ 2014 $
Apr 1 Prepaid b/f 4,000 Mar 31 Profit and Loss 38,500
" 1 Bank 24,000 " 31 Prepaid c/f (9,000 x 5/6) 7,500
Sept 1 Bank 9,000
2014
Mar 1 Bank 9,000
46,000 46,000
(b)
The accrual concept has been violated. Under the accrual concept, revenues should be recognised when
earned and expenses should be recognised when incurred, and not when money is received or paid.
Rental revenue for the year ended 31 March 2014 should be $96,000 (= $8,000 × 12) instead of the
$88,000 amount received.
Insurance
2011 $ 2011 $
Dec 15 Bank 39,500 Dec 31 Profit and loss 34,400
" 31 Accrued c/f ($3,600 2/6) 1,200 " 31 Prepaid c/f ($8,400 9/12) 6,300
40,700 40,700
Sundry Expenses
2011 $ 2011 $
Dec 20 Bank 7,900 Dec 31 Profit and loss 9,100
" 31 Accrued c/f 1,200
9,100 9,100
Longman (2011, 1) (Accrual and Prepayment)
Emerald Co
Income Statement for the year ended 30 September 2012
$ $
Sales 1,498,621
Less Cost of goods sold:
Opening inventory 45,896
Add Purchases 756,981
802,877
Less Closing inventory (49,867) (753,010)
Gross profit 745,611
Less Expenses:
Rent and rates ($228,963 $12,865) 216,098
Wages and salaries ($318,692 $8,756) 309,936
Utilities ($178,870 + $3,861) 182,731
Repairs and maintenance ($25,694 + $5,680) 31,374
Sundry expenses 52,753 (792,892)
Net loss (47,281)
(B)
(a)
Rental income
2009 $ 2009 $
Jan 1 Accrued b/d 12,000 Jan 1 Prepaid b/d 28,000
Dec 31 Profit and loss 629,000 Bank ($730,000 - $100,000) 630,000
Dec 31 Prepaid c/d 32,000 Dec 31 Accrued c/d ($10,000 + $10,000 x 1/2) 15,000
673,000 673,000
(b)
Rates
2009 $ 2009 $
Jan 1 Bank 1,830 Jan 1 Accrued b/d ($1,830 x 1/3) 610
Apr 1 Bank 2,160 Dec 31 Profit and loss 8,420
Jul 1 Bank 2,160
Oct 1 Bank 2,160
Dec 31 Accrued c/d ($2,160 x 1/3) 720
9,030 9,030
(b)
Macho Club
Trading account for the year ended 31 December 2007
$ $
Opening stock 6,320 Sales 48,200
Add: Purchases (W1) 27,900
34,220
Less: Closing stock 5,730
Cost of T-shirts sold 28,490
Commission on T-shirt sales 4,200
Income and expenditure: profit on sale of T-shirts 15,510
48,200 48,200
W1
Creditors
$ $
Cash/Bank 22,890 Balance b/d 8,970
Balance c/d 13,980 Purchases (balancing figure) 27,900
36,870 36,870
(c) (i) Stock turnover rate (in months) = (Average inventory / Cost of goods sold) x 12
Average inventory = ($6,320 + $5,730)/2 = $6,025
Cost of goods sold = $28,490
Stock turnover rate (in months) = ($6,025/$28,490) x 12 = 2.54 months
(ii) Average credit period received from trade creditors (in days) = (Average creditors / Net credit purchases) x 365
Average creditors = ($8,970 + $13,980)/2 = $11,475
Net credit purchases = 27,900
Average credit period received from trade creditors (in days) = ($11,475/$27,900) x 365 = 150.12 days
Bad Debts and Allowance for doubtful Account
Longman Question Bank 16 (Bad Debts and Allowance for doubtful Account)
Cammy Chin
Income Statement for the year ended 30 April 2014
$ $
Sales 506,890
Less Returns inwards 2,390
504,500
Less Cost of goods sold:
Opening inventory 84,052
Add Purchases 214,653
Carriage inwards 3,970
302,675
Less Returns outwards 6,157
296,518
Less Closing inventory 41,000 255,518
Gross profit 248,982
Add Other revenues:
Discounts received 11,762
Rental income 112,000
372,744
Less Expenses:
Carriage outwards 3,520
Discounts allowed 10,175
Rates and insurance ($11,430 + $2,150) 13,580
Rent 181,760
Wages and salaries ($51,012 − $5,370) 45,642
Bank charges 1,123
Loan interest ($90,000 × 5% × 1/12) 375
Bad debts 2,500
Allowance for doubtful accounts [($164,900 − $2,500) × 6%] 9,744 268,419
Net profit 104,325
HKDSE (2014, 1) (Control)
(a)
Sales Ledger control
$ $
Balance b/d 399,700 Returns inwards 23,280
Sales 4,392,400 Allowance to customer 31,120
Bank 4,137,400
Bad debts 36,000
Balance c/f 564,300
4,792,100 4,792,100
(b)
Journal
Date Details Dr Cr
2013 $ $
Dec 31 Allowance for Doubtful Accounts 4,142
Profit and loss – Decrease in allowance [$38,000 ($564,300 x 6%)] 4,142
(b)
Coles Ltd
Balance Sheets as at 31 December (extract)
$ $
2012 Trade receivables ($490,800 $7,800) 483,000
Less Allowance for doubtful debts (24,150) 458,850
2013 Trade receivables ($389,000 $15,000) 374,000
Less Allowance for doubtful debts (14,960) 359,040
Details Dr Cr
$ $
(i) Bad debts ($7,800 50%) 3,900
Treasure Ltd (accounts receivable) 3,900
(ii) Profit and loss — Allowance for doubtful accounts [($468,000 $3,900) 5%] 23,205
Allowance for doubtful accounts 23,205
(iii) Treasure Ltd (accounts receivable) 3,900
Bad debts recovered 3,900
Bank 3,900
Treasure Ltd (accounts receivable) 3,900
(iv) Profit and loss — Increase in allowance for doubtful accounts 6,695
Allowance for doubtful accounts [($598,000 5%) $23,205] 6,695
(b) The creation of an allowance for doubtful accounts is an application of the prudence concept, which
requires an allowance or provision be made for possible expenses or losses, whether the amount is
certain or just an estimate.
Under this concept, an allowance should be made at the end of an accounting period for accounts
receivable that are likely to become uncollectible (i.e., doubtful accounts). The amount of doubtful
accounts is only an estimate
Bank Rec
HKDSE (2014, 9) (Bank Rec)
(a)
Cash Book (Bank)
$ $
Balance b/d 56,000 Creditors (i) (2,700 x 2) 5,400
Dividend income (ii) 1,250 Debtors – dishonored cheque (iv) 3,260
Debtors – post-dated cheque (v) 6,750
Balance c/d 41,840
57,250 57,250
(b)
Bank Reconciliation Statement as at 31 December 2013
$ $
Balance as per adjusted cash book 41,840
Add: Unpresented cheques (vi) 5,500
Credit transfer wrongly (iii) 3,500 9,000
50,840
Less: Uncredited deposit (vi) (53,100)
Overdraf balance as per bank statement (2,260)
(c)
Journal
2013 Dr Cr
December 31 $ $
(vii) Sales 22,900
Debtors 22,900
Promotion expenses 16,000
Inventory 16,000
(viii) Prepaid rental expenses ($20,400 x 3/12) 5,100
Rental expenses 5,100
(ix) Maintenance expenses 324,000
Maintenance revenues ($72,000 x 1/24 + $144,000 x 1/36 + $108,000 x 2/36) 13,000
Unearned maintenance revenues ($72,000 x 23/24 + $144,000 x 35/36 + $108,000 x 34/36) 311,000
Dr Cash $324,000 Dr Cash $324,000
Cr Maintenance revenues $324,000 Dr Maintenance expenses $324,000
Dr Maintenance revenues $288,000
Cr Unearned revenues $288,000
Journal
Date Details Dr Cr
2013 $ $
Mar 31 Sundry revenue 300,000
Goodwill 300,000
(b)
Cash Book (Bank)
$ $
Balance b/d 62,300 Trade payables (iii) 82,750
Trade payable (ii) 7,800 Trade receivables (iii) 32,110
Trade receivables (iii) 287,000 Accrued management fee (v) 8,800
Trade receivables (iv) 125,000 Rent fee (vi) 165,500
Dividend income (iv) 2,840 Balance c/d 195,780
484,940 484,940
(a)
Cash Book
2011 $ 2011 $
Dec 31 Debtors – credit transfer (ii) 46 250 Dec 31 Balance b/d 9 530
“ 31 Balance c/d 49 895 “ 31 Connie Fashion Co (i) 1 800
“ 31 Carmen Co – Post-dated cheque (i) 7 235
“ 31 Chloe Ltd – Returned cheque 72 530
“ 31 Management fees 5 025
“ 31 Bank charges 25
96,145 96,145
(b)
Bank Reconciliation Statement as at 31 December 2011
$ $
Balance as per adjusted cash book (49 895)
Add Unpresented cheques
— 532020 31 600
— 532022 68 760
— 532009 ($10 500 – $10 000 – $300) (iv) 200 100 560
50 665
Less Uncredited deposit – Cherry Ltd 8 005
Bank error – incorrect debit (iii) 105 660 113 665
Balances as per bank statement (63,000)
Unpresented cheque 532009 + Unpresented cheque 532010 = $10 500 – $10 000 = $500
Unpresented cheque 532009 + $300 = $500
Unpresented cheque 532009 = $500 – $300 = $200
(a)
Cash Book
2011 $ 2011 $
Dec 31 Balance b/d 4000 Dec 31 Bank charges (i) 469
“ 31 Trade receivables (ii) 7933 “ 31 Balance c/d 11464
11933 11933
(b)
VM Ltd
Bank reconciliation Statement as at 31 December 2011
$ $
Balance as per adjusted bank account 11464
Add: Unpresented cheques (iii)
30801 2453
30834 3758 6211
17675
Less: Uncredited deposit (iv) 5100
Balance as per bank statement 12575
(c) Uses:
— locating accounting errors either made by the bank or by the firm
— explaining differences at a given date between the balance of the bank account as shown in the
firm’s cash book and the balance of bank statement as prepared by the bank
— preventing fraud by employees
(a) (i) Net profit for the year vs net increase in cash and bank balances for the year:
— Net profit for the year is arrived at matching all expenses and revenues of a particular trading
period with adjustments of accruals and prepayments.
— Cash and bank balances represents the amount of cash in hand and on demand (net of cash
inflows and outflows).
— The business makes profit by converting cash into assets like accounts receivables, inventories,
investment, etc. and then converting such assets back into cash.
— A business wants to get hold of cash in the shortest possible time put to keep the least amount of
cash in hand so as to increase the number of trading cycles and hence the trading profits.
(ii) Bank balance in the cash book vs the bank statement balance as at 31 December 20X6:
— The cash book makes records from the company’s point of view. It debits all cash and cheques
deposited into the bank account, and credit bank charges and cheques drawn on payees.
— The transactions recorded in the bank statement are shown from the point of view of the bank, in
that payment are debited and receipts are credited.
— The balance in the bank statement rarely agree with the cash book balance of the same date:
The discrepancy may arise from:
Items arising from time differences e.g. cheques issued to suppliers not yet presented to the
bank for payment, deposits made by the company not yet credited by the bank
errors made by the bank or errors present in the cash book
(b) Correct bank balance = $39,580 Cr + $12,980 + $14,785 + $18,999 $11,100 $1,900 $7,180
= $6,6164 Cr (overdraft)
1ST Mock Exam 2012-2013 (Bank Rec)
1. (a)
Cash Book (bank column only)
$ $
Balance b/f 1,000 Peter – dishonored cheque (i) 1,440
Accounts payable – stale cheque (ii) 13,800 Suspense (iii) 100
Nicole – credit transfer 1,900 Electricity – autopay (vi) 1,500
Suspense (ix) (1500 + 5100) 6,600 Balance c/f 20,260
23,300 23,300
(b)
Winter Company
Bank reconciliation statement as at 31 December 2010
$ $
Balance as per adjusted cash book 20,260
Add: Unpresented cheques – No. 1600 (ii) 7,000
Bank error (v) 4,500 11,500
31,760
Less: Uncredited cheque (iv) 9,000
Bank error (viii) 900 9,900
Balance as per bank statement 21,860
1. (a)
Cash Book (bank column only)
$ $
Balance b/d 5,360 Accounts receivable – post-dated cheque (ii) 370
Accounts payable – stale cheque (i) 300 Salaries – Autopay (iv) 3,400
Rental income – Direct deposit (v) 6,800 Balance c/d 8,690
12,460 12,460
(b)
Bank reconciliation statement as at 30 April 2011
$ $
Balance as per adjusted cash book 8,690
Add: Unpresented cheques (i)
No. 1314 520
No. 1320 2,013
Autopay of salaries delayed 3,400 5,933
14,623
Less: Uncredited cheque (ii) 5,200
Bank error 870 6,070
Balance as per bank statement 8,553
HKET Mock (1, 2011) (Bank Rec)
(a)
Cash Book
2011 $ 2011 $
Oct 31 Balance b/d 629,000 Oct 31 Cash withdrawal (ii) 9,000
Oct 31 Mr. Lee – Returned cheque (iii) 50,000 Oct 31 Balance c/d 670,000
679,000 679,000
(b)
A Ltd
Bank Reconciliation Statement as at 31 October 2011
$
Adjusted balance as per cash book 670,000
Add Unpresented cheque – Mr. Ho (iv) 30,000
700,000
Less Uncredited cheque – Mr. Chan (i) (100,000)
Balance as per bank statement 60,000
(c)
(i) The accountant resigned in October, but it is found to have a cheque received earlier which has not yet
credited to the bank account. This shows the accountant did not give his due care to finish the work on
time. He did not utilise his professional competence and due care to protect the benefit of his employer.
He may violate the principle "Professional Competence and Due Care" under the Code of Ethics.
(ii) The actual cash withdrawal is $10,000, but the record on cash book is only $1,000 and the actual cash
balance is also $1,000. That means there is $9,000 being taken without any record. The accountant may
not necessary be the one who took the money $9,000, but he may dishonestly record the amount in
cash book, or purposely hide the record or miss out the record. He may violate the principle "Integrity"
under the Code of Ethics.
(iii) The cheque was rejected because of the incorrect payee name, this may be because the accountant did
not write it and check it carefully and caused Mr. Lee cannot honour the cheque. This may adversely
affect the goodwill of A Ltd. He did not utilise his professional competence and due care to protect the
benefit of his employer. He may violate the principle "Professional Competence and Due Care" under
the Code of Ethics.
Longman Mock (2, 2011) (Bank Rec)
(a)
Cash Book
2012 $ 2012 $
Mar 31 Dividends —Direct credit 2,750 Mar 31 Balance b/d 58,339
" 31 Balance c/d 81,540 " 31 Management fees —Direct debit 7,195
" 31 Overdraft interest 18,756
84,290 84,290
(b)
Karen & Co
Bank Reconciliation Statement as at 31 March 2012
$
Corrected overdraft balance as per cash book (81,540)
Add Unpresented cheque (Salem Ltd) 126,875
44,335
Less Uncredited cheque (Paul Chan) (7,590)
Overdraft balance as per bank statement (37,745)
AAT 2011 (Pilot Paper 2, 6) (Bank Rec)
6 (a)
Tai Sang Company
Cash Book (Bank Column Only)
2010 $ 2010 $
Aug 31 Balance b/d ($4,796 $2,350) 2,446 Aug 31 Standing order (rates) 136
" 31 Drawing overstated ($410$140) 270 " 31 Direct debt (insurance) 153
" 31 Credit transfer – B Limited 268 " 31 Balance c/d 2,703
" 31 Bank interest 8
2,992 2,992
Sep 1 Balance b/d 2,703
(b)
Tai Sang Company
Bank reconciliation statement as at 31 August 2010
$ $
Balance as per bank statement 2,670
Add Uncredited itemsCompany A 185
Uncredited itemsSales 640 825
3,495
Less Unpresented cheques (211016) 290
Unpresented cheques (211016) 502 792
Balances as per updated cash book 2,703
(c) One possible reason is when a cheque is deposited into the bank by Tai Sang Company, it takes at least
One full working day for the bank to clear the cheque. As the company deposited the cheque on 31
August according to its record in bank column of the cash book, it would only be credited to Tai Sang
Company’s account on 1 September by the bank. Hence, this cheque was not shown in the bank
statement as at 31 August.
(a)
Cash Book
2010 Details Discount Cash Bank 2010 Details Discount Cash Bank
Mar $ $ $ Mar $ $ $
1 Balance b/d 38,900 1 Balance b/d 6,240
2 Debtors 216 6,984 5 Purchases 1,000
5 Sales 5,600 5 Bank 4,600
5 Cash 4,600 11 Creditors 150 2,850
16 Debtors 400 19,600 22 Creditors 16,500
29 Debtors 27,800 30 Salaries 14,000
31 Debtors 93 3,007 31 Bank service charge (ii) 200
31 Balance c/d 31 Rent (iv) 18,000
31 Debtors (v) 4,100
31 Balance c/d 28,000 11,001
709 64,100 42,391 150 64,100 42,391
(b)
Bank reconciliation statement as at 31 March 2010
$
Balance as per bank statement 27,194
Add Lodgement not yet recorded by bank (i) 3,007
30,201
Less Unpresented cheques (iii) 19,200
Balances as per updated cash book 11,001
HKCEE (2007, 4) (Bank Rec)
(a)
Cash Book
2007 Details Cash Bank 2007 Details Cash Bank
Mar $ $ Mar $ $
1 Balance b/d 16,400 1 Balance b/d 4,590
3 Debtors 100,480 4 Creditors ($2,000 x 98%) 1,960
8 Creditors 3,000 16 Drawings 9,600
10 Sales 15,600 16 Bank ($15,600 $9,600) 6,000
16 Cash ($15,600 $9,600) 6,000 21 Rent 23,000
30 Debtors 1,650 26 Furniture – deposit ($5,000 x 20%) 1,000
31 Petty cash ($5,000 $1,100) 3,900
31 Balance c/d 12,500 80,580
32,000 111,130 32,000 111,130
(b)
Bank reconciliation statement as at 31 December 2008
$ $
Balance as per cash book in (a) 80,580
Add: Unpresented cheques (iii) 9,050
Direct deposit by customer (v) 2,800 11,850
92,430
Less: Cheque honoured by bank (i) 3,000
Lodgement not yet recorded by bank (ii) 1,650
Autopay for rates (iv) 860 5,510
Balance as per bank statement 86,920
(a)
Cash Book (bank column only)
$ $
Balance b/d (19,900 + 315,000 300,700) 34,200 Bank charges 80
Bank deposit interest 650 Star Ray Limited dishonoured cheque 10,250
Kettler Limited 2,400 Balance c/d 26,920
37,250 37,250
(b)
Bank Reconciliation Statement as at March 2006
$
Adjusted balances as per cash book 26,920
Add Uncredited cheque 16,500
43,420
Less Lodgements not yet recorded by bank 6,630
Adjusted balances as per bank statement 36,790
Depreciation
HKDSE (2014, 2) (Depreciation)
(a)
Year Calculation Depreciation
2011 ($240,000 $4,000) / 10 = $23,600 $23,600
2012 $23,600 + $180,000 / 9 = $43,600 $43,600
2013 $43,600 x 6/12 = $21,800 $21,800
(b)
Journal
Debit Credit
201 $ $
3
Oct 15 Accumulated depreciation ($23,600 + $43,600 + 21,800) 89,000
Insurance compensation receivable 210,000
Profit and loss – Loss on disposal 121,000
Motor vehicle ($240,000 + $180,000) 420,000
(b)
Accumulated Depreciation: Equipment
2012 $ 2012 $
Dec 31 Disposal: Equipment (W2) 54,000 Jan 1 Balance b/f (W1) 135,000
“ 31 Balance c/f 204,300 Dec 31 Depreciation (W3) 123,300
258,300 258,300
Explanations:
— Same accounting policy should be applied on liked items across years
— A change in depreciation method is allowed when it will result in a more true and fair presentation
the firm's financial position.
— To stabilize operating results over year is not a justifiable reason for the change in depreciation
method
(a) (1) Depreciation expenses = ($3 600 000 $3 455 000) + ($2 400 000 + $60 000) x 0.25 x 10/12
= 145 000 + 512 500
= 657 500
(a) (2)
Accumulated Depreciation – lorries
2011 $ 2011 $
Dec 31 Balance c/d 1 702 800 Jan 1 Balance b/d 1 200 000
Dec 31 Depreciation (W1) 502,800
1 702 800 1 702 800
W1: Depreciation for lorries = ($1 850 000 1 200 000) x 20% + ($1 900 000 $36,000) x 20% = $502 800
(b)
Journal
2011 Debit Credit
December $ $
(i) Loan interest 5050
Accrued loan interest 5050
(ii) Accumulated depreciation – Motor vehicles 40 000
Cash 48 000
Motor vehicles 80 000
Profit and loss – Profit on disposal of motor vehicles 8 000
(ii)
Accumulated Depreciation on Machinery
2013 $ 2013 $
Apr 1 Disposals — No. 4 (W1) 20,625 Jan 1 Balance b/f 289,600
Jul 1 Disposals — No. 7 (W2) 5,250 Dec 31 Depreciation (W4) 110,000
Dec 1 Disposals — No. 5 (W3) 40,500
" 31 Balance c/f 333,225
399,600 399,600
(iii)
Machinery Disposals
2013 $ 2013 $
Apr 1 Machinery — No. 4 30,000 Apr 1 Acc. depreciation. — No. 4 20,625
Jul 1 Machinery — No. 7 18,000 Jun 30 Bank 12,500
Dec 1 Machinery — No. 5 72,000 Jul 1 Acc. depreciation. — No. 7 5,250
" 31 Profit and loss — " 1 Bank 11,300
Profit on disposal 15,175 Dec 1 Acc. depreciation. — No. 5 40,500
" 1 Machinery —Trade-in value (No. 5) 45,000
135,175 135,175
(b) Depreciation is the systematic allocation of the depreciable amount of a tangible non-current
asset over its estimated useful life.
Causes of depreciation
- wear and tear
- obsolescence
- rust
- rot and decay
- inadequacy
- depletion
1 Mock Exam 2012-2013
ST
(Depreciation)
2 (a)
$
Purchases price ($400,000 x 90%) 360,000
Air-conditioning system 10,000
Freight charges 3,000
Cost of motor vehicle 373,000
(b)
Journal
Debit Credit
$ $
Sales 9,000
Suspense 9,000
Accumulated depreciation – Motor vehicle [$100,000 x 20% x 9/12 + ($350,000 $100,000)] 265,000
Motor vehicle – trade-in allowance 9,000
Profit and loss – Loss on disposal 76,000
Motor vehicle 350,000
Motor vehicle ($373,000 $9,000) 364,000
License fee ($2,400 x 3/12) 600
Prepayment ($2,400 $600) 1,800
Bank 366,400
Depreciation – Motor vehicle ($373,000 x 20% x 3/12) 18,650
Accumulated depreciation – Motor vehicle 18,650
5 (a)
Cost of the extension $
Construction materials used 85,000
Labour cost 55,000
Installation of lighting system 20,500
160,500
(b)
Accumulated depreciation - building
$ $
Balance c/d 73,605 Balance b/d (600,000 x 2% x 5) 60,000
Depreciation (W1) 13,605
73,605 73,605
W1: 480,000 x 20% + 480,000 x (1 – 20%) x 20% + 480,000 x (1 – 20%) x (1 – 20%) x 20% = 234,240
W2: (480,000 – 234,240) x 20% + 120,000 x 20% x 10/12 = 49,152 + 20,000 = 69,152
(c) Allowance for doubtful debts this year = (59,000 + 1,000 – 4,000) x 3% = 1,680
The expense incurred in increase in allowance for doubtful debts = 1,680 – 1,400 = 280
(d) — Under the matching concept, expenditure incurred should match with the revenue generated in
the same accounting period.
— The cost of non-current assets should match with the revenue generated. Depreciation is thus
provided to allocate the cost of non-current assets over their estimated useful life.
— Under the prudence concept, allowance for doubtful debts is to be made in the year to ensure
that sales revenues are not overstated.
(a)
Machine
2011 $ 2011 $
Jan 1 Balance b/d 450,000 Oct 31 Disposal – Machine 450,000
(b)
Accumulated Depreciation – Machine
2011 $ 2011 $
Oct 31 Disposal – Machine 318,494 Jan 1 Balance b/d 283,887
Oct 31 Depreciation 34,607
318,494 318,494
(c)
Disposal – Machine
2011 $ 2011 $
Oct 31 Machine 450,000 Oct 31 Accumulated Depreciation – Machine 318,494
Oct 31 Cash 120,000
Oct 31 Profit & Loss – Loss on disposal 11,506
450,000 450,000
(d)
Ms. Ho
Income Statement for the year ended 31 December 2011 (Extract)
$
Expense :
Depreciation Machine 34,607
Loss in disposal of machine 11,506
(2) $22,000
(B)
Journal
Date Details Dr Cr
2007 $ $
Apr 1 Deposit – machine 8,000
Bank 8,000
Jul 1 Machinery 58,000
Creditors 50,000
Deposit – machine 8,000
“ 1 Repair expenses 2,000
Bank 2,000
Oct 1 Creditors 50,000
Bank 50,000
Dec 31 Depreciation expense [($58,000 – $4,000) ÷4 x 6/12] 6,750
Accumulated Depreciation – machinery 6,750
2008
Apr 30 Depreciation expense [($58,000 – $4,000) ÷4 x 4/12] 4,500
Accumulated Depreciation – machinery 4,500
“ 30 Accumulated Depreciation – machinery ($6,750 + $4,500) 11,250
Bank 25,000
Profit and loss (Loss on disposal of machinery) 2,1750
Machinery 58,000
(A)
Cost of the new machine $
Acquisition cost ($10,000 + $55,000) 65,000
Delivery charges 4,000
Insurance 1,000
Steel case 8,000
Installation cost 2,000
80,000
(B)
Net profit for the year ended 31 March 2007 Working capital as at 31 March 2007
(a) Increase Increase
(b) No change No change
(c) Decrease Decrease
(d) No change Decrease
(c)
Journal
Debit Credit
$ $
Debtors 36,000
Provision for depreciation – machinery ($12,400 x 3 + $12,400 x 9/12) 46,500
Machinery 64,000
Profit and loss (Profit on disposal of machinery) 18,500
Correction of errors
HKDSE (2012, 9) (Limited company and correction of errors)
(a) (1)
Journal
2011 Dr Cr
December 31 $ $
(i) Profit and Loss 35,820
Allowance for doubtful debts (716,400 x 5%) 35,820
(ii) Cash at bank (600,000 x 6) 3,600,000
Ordinary share capital (600,000 x 2) 1,200,000
Share premium (600,000 x $4) 2,400,000
(iii) Cash at bank 900,000
2% Debentures 900,000
Trade payables (900,000 x 25% / 96%) 234,375
Profit and Loss Discounts received 9,375
Cash at bank (900,000 x 25%) 225,000
Profit and Loss Debenture interest (900,000 x 2% x 1/12) 1,500
Accrued expense 1,500
(iv) Accumulated depreciation 726,000
Profit and Loss – Profit on disposal 9,000
Property, plant and equipment 726,000
Cash (165,000 – 156,000) 9,000
(v) Profit and Loss 135,000
General reserve 135,000
(vi) Profit and Loss – Advertising expenditure 424,800
Prepayment 424,800
(a) (2)
Dragon Ltd
Statement of Financial Position as at 31 December 2011
$
ASSETS
Non-current assets
Property, plant and equipment [(4,800,000 – 726,000) – (1,240,000 – 726,000)] 3,560,000
Current assets
Inventory 545,000
Trade receivables (716,400 – 35,820) 680,580
Cash at bank (760,800 + 3,600,000 + 900,000 – 225,000 – 9,000) 5,026,800
6,252,380
Total assets 9,812,380
(b)
Journal
2011 Debit Credit
December $ $
(i) Loan interest 5050
Accrued loan interest 5050
(ii) Accumulated depreciation – Motor vehicles 40 000
Cash 48 000
Motor vehicles 80 000
Profit and loss – Profit on disposal of motor vehicles 8 000
(b)
Healthy Food Company
Statement of financial position as at 31 December 20X6
$ $
ASSETS
Non-current assets
Office machinery 148,000
Less: Accumulated depreciation 45,300
102,700
Current assets
Inventories ($127,600$10,000) 117,600
Account receivables, net ($85,500$10,800$540) 75,240
Deposit (re: motor vehicle) 10,000
Rates prepaid 2,750
205,590
Total Assets 308,290
(b)
Henry Chan
Statement to correct the net profit for the year ended 31 September 2014
$ $
Net profit before adjustments 525,000
Add : Discount received (ii) 2,000
Purchases (iii) 23,300
Insurance (v) 1,150 26,450
551,450
Less: Sales (i) 175,000
Returns inwards (iii) 42,000
Repairs and Maintenance (iv) 17,000
Salaries (v) 3,000 237,000
Corrected net profit 314,450
(c)
The business entity concept has been violated in item (iv)
According to this concept, a business is to be treated as an entity separate from its owner. No
personal
transactions of the owner are to be recorded in the books of the business. Therefore, the cost of
repairs
to Henry Chan’s home should not be recorded as a business expense.
(b )
Suspense
$ $
Returns inwards (iii) 1,800 Balance b/f (balancing figure) 29,810
Rent revenue (iv) 39,000 Accounts receivable (i) 5,400
Discounts received (ii) 3,990
Purchases (vii) 1,600
40,800 40,800
(c)
Statement of Corrected Net Profit for the year ended 30 June 2012
$ $
Net profit as per draft accounts 1,395,752
Add Returns inwards overstated (iii) 1,800
Rent revenue understated (iv) 39,000
Bad debt recovered omitted (v) 2,950
Courier fees overstated (vi) 520 44,270
1,440,022
Less Discounts received overstated (ii) 90
Purchases understated (vii) 1,600 (1,690)
Corrected net profit 1,438,332
1ST Mock Exam 2012-2013 (Correction Errors)
6. (a)
Journal
Debit Credit
$ $
(i) Accounts receivable 500
Profit and loss : Bad debts recovered 500
(ii) Profit and loss : Closing inventory 1,050
Inventory 1,050
(iii) Profit and loss : Discounts allowed ($1,850 x 2) 3,700
Accounts receivable 3,700
(iv) Suspense ($3,190 x 2) 6,380
(b)
Fish Limited
Statement to calculate the corrected net profit for the year ended 31 March 2011
$ $
Net profit before adjustments 159,620
Add : Bad debts recovered omitted (i) 500
Purchases overcast (v) 360
Inventory taking omitted (vi) 18,200 19,060
178,680
Less: Closing inventory overstated (ii) 1,050
Discounts allowed recorded on the wrong side (iii) 3,700
Sales overstated (vi) 26,000
Promotional expense omitted (vi) 18,200 48,950
Corrected net profit 129,730
(b)
Suspense
$ $
Balance b/d (balancing figure) 939 Purchases 520
Sundry expenses 123 Return inwards 560
Commission income 334 Return outwards 650
Commission expenses 334
1,730 1,730
(c)
Statement to calculate the correct net profit for the year ended 31 December 2009
$ $
Draft net profit 193,450
Add Telephone expenses paid for the owner (vi) 300
Carriage inwards posted twice as sundry expenses (ix) 123
Commission income recorded as commission expenses (x) 668 1,091
194,541
Less Purchases undercast (i) 520
Returns inwards recorded as returns outwards (ii) 1,210
Drawings recorded as sales (iii) 800
Sales made at a special discount (vii) 140
Loss on disposal of fixed assets (viii) 16,000 18,670
Corrected net profit 175,871
HKCEE (2009, 2) (Correction Errors)
(A) Sales revenue should be recorded after the gift packages are delivered to the customers.
Realisation principle should be adopted.
Revenue for a period is determined by applying the realization principle, which requires that the revenue be
recognized and recorded when goods are sold or when services are rendered.
(B)
(a)
Journal
Debit Credit
$ $
(i) Salaries (profit and loss) 2,000
Prepayments 1,000
Accruals 1,000
(ii) Rates (profit and loss) ($860 x 2) 1,720
Suspense 1,720
(iii) Accumulated depreciation – office equipment 8,000
Debtors 130
Office equipment 8,000
Gain on disposal of assets (profit and loss) 130
Accumulated depreciation – office equipment ($8,000 x 10%) 800
Depreciation (profit and loss) 800
(b)
Statement of adjusted net profit for the year ended 31 December 2008
$ $
Net profit per draft accounts 164,555
Add Gain on disposal of assets 130
Depreciation on fully depreciated asset 800 930
165,485
Less Accrued salaries recorded as prepayment 2,000
Opening balance of prepaid rates recorded as credit balance 1,720 3,720
Corrected net profit 161,765
(a)
Bamboo Limited
Adjusted trial balance as at 31 March 2007
Debit Credit
$ $
Ordinary share capital 1 April 2006 180,000
Retained profits, 1 April 2006 20,000
Plant and equipment, at cost 692,460
Bank loan, repayable in 2010 120,000
Sales 985,000
Debtors 105,690
Cost of goods sold 538,600
Administrative expenses 123,700
Selling expenses 187,500
Interest on bank loan 5,000
Deposits received from debtors 16,000
Share application money received 70,000
Cash at bank 47,400
Creditors 96,710
Stock, 31 March 2007 22,100
Prepaid selling expenses, 31 March 2007 8,000
Accumulated depreciation – plant and equipment, 31 March 2007 246,540
Suspense 3,800
1,734,250 1,734,250
(b)
Journal
Debit Credit
$ $
(i) Suspense 1,600
Interest income 800
Prepaid selling expenses 800
(ii) Bank (Cash) 40
Debtors 4,844
Sales 4,884
(iii) Administrative expenses 300
Creditors 300
(iv) Administrative expenses 16,000
Plant and equipment 10,600
Suspense 5,400
Accumulated depreciation – plant and equipment 2,120
Administrative expenses ($10,600 x 20%) 2,120
(v) Stock 6,000
Cost of goods sold 6,000
(vi) Interim dividend 12,000
Deposits received from debtors 12,000
(vii) Share application money 70,000
Ordinary share capital 40,000
Share premium ($0.4 x 40,000) 16,000
Bank ($1.4 x 10,000) 14,000
HKCEE (2006, 5) (Bank Rec and correction of error)
(a)
Cash Book (bank column only)
$ $
Balance b/d (19,900 + 315,000300,700) 34,200 Bank charges 80
Bank deposit interest 650 Star Ray Limiteddishonoured cheque 10,250
Kettler Limited 2,400 Balance c/d 26,920
37,250 37,250
(b)
Bank Reconciliation Statement as at March 2006
$
Adjusted balances as per cash book 26,920
Add Uncredited cheque 16,500
43,420
Less Lodgements not yet recorded by bank 6,630
Adjusted balances as per bank statement 36,790
(c)
Journal
Details Dr Cr
$ $
(v) Salaries (Profit and loss) 500
Suspense 500
(vi) Purchases (Trading) 2,000
Creditors 2,000
(vii) Jane Limited ($870$780) 90
Returns inwards (Trading) 90
(viii) Prepaid electricity 1,240
Electricity (Profit and loss) 1,240
(ix) Discount allowed (Profit and loss) 450
Suspense 8,550
Mr Wu 9,000
(x) Bank loan 200,000
6% debentures 200,000
Debenture interest (Profit and loss) 1,000
Interest payable (200,000 x 6% x 1/2) 1,000
(d)
Statement of adjusted profit for the year ended 31 March 2006
$ $
Net profit per draft accounts 80,260
Add Bank deposit interest not recorded 650
Electricity prepaid 1,240
Returns inwards overstated 90 1,980
82,240
Less Bank charges not recorded 80
Salaries undercast 500
Purchases omitted 2,000
Discount allowed not recorded 450
Debenture interest accrued 1,000 4,030
Adjusted net profit 78,210
(b)
Profit and Loss Appropriation
$ $
Interest on capital – Abby (150,000 x 8%) 12,000 Profit and loss (correct net profit) 157,900
Bobby (300,000 x 8%) 24,000 Interest on drawings –Abby (18,000 x 10% x 10/12) 1,500
Salary to partner – Abby 60,000 – Bobby (12,000 x 10% x 4/12) 400
Share of profit – Abby (2/5) 25,520
Bobby (3/5) 38,280
159,800 159,800
(c)
Current
Abby Bobby Abby Bobby
$ $ $ $
Balance b/f 43,000 — Balance b/f — 27,000
Drawings 18,000 12,000 Profit and loss appropriation
Profit and loss appropriation –Interest on capital 12,000 24,000
–Interest on drawings 1,500 400 –Salary ($60,000 $20,000) 40,000 —
Balance c/f 15,020 76,880 –Share of profit 25,520 38,280
77,520 89,280 77,520 89,280
Revaluation
$ $ $
Equipment ($600,000 x 20%) 120,000 Property ($2,320,000 – $1,250,000) 1,070,000
Allowance for doubtful accounts (550,000 x 4%) 22,000
Profit on revaluation – Capital: Carrie (3/5) 556,800
Capital: Daisy (2/5) 371,200 928,000
1,070,000 1,070,000
Goodwill Adjustment
Partner Goodwill shared in old ratio Goodwill shared in new ratio Gain (loss) from change in ratio Required entries
Carrie (3/5) $210,000 — ($210,000) Cr Capital: Carrie $210,000
Daisy (2/5) $140,000 (1/2)$175,000 $35,000 Dr Capital: Daisy $35,000
Ellen — (1/2)$175,000 $175,000 Dr Capital: Ellen $175,000
$350,000 $350,000
(b)
Daisy and Ellen
Statement of Financial Position as at 1 January 2012
$ $ $
Non Current assets
Property, net 2,320,000
Equipment, net ($600,000 x 80%) 480,000
2,800,000
Current assets
Trade receivables 550,000
Less Allowance for doubtful debts (22,000) 528,000
Cash at bank ($100,000 + 850,000 $230,000) 720,000
1,248,000
Less Current Liabilities
Trade payables (275,000)
Net Current assets 973,000
3,773,000
(d) If revaluation is not done on the retirement of a partner, any increase or decrease in the value of the
old partnership’s net assets will belong to the new partnership. When these net assets are later sold by
the new partnership, any increase or decrease in the value of the old partnership’s net assets will be
realised and then shared among the new partners in the new profit and loss sharing ratio. As a result,
some partners in the new partnership will gain from the increase in the value of net assets of the old
partnership without having to pay for it, while others will lose without being compensated.
(a) (1)
Realisation
$ $ $
Plant and machinery 129,000 Loan from Andy — Office equipment 60,000
Office equipment 134,500 Capital: Carol — Inventories 11,500
Inventories 92,000 Loan from Bob —Trade receivables 36,100
Trade receivables 40,500 Bank – remaining assets 285,700
Bank — Dissolution expenses 4,920 Trade payables — Discounts received 720
Loss on realization –
Capital: Andy (2/10) 1,380
Capital: Bob (3/10) 2,070
Capital: Carol (5/10) 3,450 6,900
400,920 400,920
(2)
Bank
$ $
Balance b/f 2,200 Loan from Bob (50,000 – 36,100) 13,900
Realisation – remaining assets 285,700 Trade payables (50,200 720) 49 480
Capital: Carol 9,250 Accrued expenses 11500
Realisation—Dissolution expenses 4,920
Capital: Andy 190,920
Capital: Bob 26,430
297,150 297,150
(3)
Capital
Andy Bob Carol Andy Bob Carol
$ $ $ $ $ $
Current — — 6,300 Balances b/d 178 000 22 000 12 000
Realisation Inventories — — 11,500 Current 14 300 6 500 —
Realisation Share of loss 1,380 2,070 3,450 Bank –Final settlement — — 9,250
Bank–Final settlement 190,920 26,430 —
192,300 28,500 21,250 192,300 28,500 21,250
(b) — will not affect the initial investment made by the partners as transactions between partners and the
partnership during the year can be shown through the current accounts instead of the capital
accounts
— debit balance of the current account due to a partner’s excessive drawings could be used as a signal
or warning to other partners
(2)
Capital
Alice Brian Clara Alice Brian Clara
$ $ $ $ $ $
Goodwill adjustment — 70,000 140,000 Balances b/d 276,000 468,000 395,000
Motor vehicle — 11,000 11,000 Goodwill adjustment 210,000 — —
Bank 100,000 — — Revaluation profit 294,000 196,000 98,000
Loan – Alice 680,000 — —
Balances c/d — 583,000 342,000
780,000 664,000 493,000 780,000 664,000 493,000
(3)
Brian and Clara
Balance sheet as at 1 January 2012
$ $ $
Fixed Assets
Premises 1,400,000
Plant and equipment 107,000
Motor vehicles ($82,100 — $22,000) 60,100
1,567,100
Current Assets
Inventory ($33,600 — $2,400) 31,200
Trade receivables ($23,800 — $2,600) 21,200
Bank ($135,500 — $100,000) 35,500
87,900
Less: Current Liabilities
Trade payables 28,600
Accrued expenses 21,400 50,000
Net current assets 37,900
1,605,000
Less: Non-current Liabilities
Loan – Alice 680,000
925,000
Financed by:
Capital accounts
– Brian 583,000
– Clara 342,000
925,000
(b) The amount of $6 000 000 should not be recognised.
Reasons:
— Prudence concept: the future benefits arising from the intangible asset are uncertain
— Money measurement concept: Alice’s professional knowledge cannot be quantified and expressed
in monetary terms
— Objectivity concept: the valuation is only a personal and subjective estimation
(b)
Leung
Trading and profit and loss account for the 3 months ended 31 March 20X6
$’000 $’000
Sales 1,260
Less: Cost of goods sold ($2,460 x 1,260/4,200) 738
Gross profit 522
Less: Operating expenses ($660 x 3/12) 165
Manager’s salary ($318 – $300 x 9/12) 93 258
Net profit 264
(c)
Leung and Chan
Trading, profit and loss and appropriation account
for the 9 months ended 31 December 20X6
$’000 $’000 $’000
Sales ($4,200 – $12,60) 2,940
Less: Cost of goods sold (2,460 x 2,940/4,200) 1,722
Gross profit 1,218
Less: Operating expenses ($660 x 9/12) 495
Net profit 723
Less: Partners’ salary – Chan ($300 x 9/12) 225
Interest on capital – Leung ($360 x 2/3 x 10% x 9/12) 18
– Chan ($360 x 1/3 x 10% x 9/12) 9 27 252
471
Share of net profit
Leung (2/3) ($471 x 2/3) 314
Chan (1/3) ($471 x 1/3) 157
471
(d)
Capital
Leung Chan Leung Chan
$’000 $’000 $’000 $’000
Goodwill adjustment — 20 Balances b/f 280 —
Current (balancing figure) 60 — Goodwill adjustment 20 —
Balance c/d (2 : 1) 240 120 Current (balancing figure) — 140
300 140 300 140
Balances b/d 240 120
(ii)
Bank
$ $
Balance b/f 28,450 Realisation—Dissolution expenses 18,750
Realisation – Machinery and equipment 37,625 Capital: Ko 242,145
Realisation – Motor vehicles 384,500 Capital: Law 284,680
Realisation – Trade receivables 95,000
245,575 245,575
(iii)
Capital
Ko Law Mok Ko Law Mok
$ $ $ $ $ $
Current — 1,500 2,000 Balances b/d 315,000 293,75010,000
Realisation — Machinery 50,000 60,000 — Current 6,000 — —
Realisation —Inventory 31,875 — — Trade payables (87,500 x 90%) — 78,750 —
Realisation Share of loss 36,900 24,600 12,300 Loan from Ko 42,500 — —
Share of deficiency (3 : 2) 2,580 1,720 — Deficiency — — 4,300
Bank–Final settlement 242,145 284,680 —
363,500 372,500 14,300 363,500 372,500 14,300
(b) Goodwill is the excess of the value of an entire business over the fair value of its separable net assets.
Adjustments for goodwill are required in the following situations:
— Changes in the profit and loss sharing ratio
— Admission of partners
— Retirement or death of partners
Decrease in allowance for doubtful accounts = {$67,392 [($1,290,500 $5,700) 4%]} = 16,000
W1 : Ivy’s share of goodwill = $400,000 3/4 = $300,000, Gary’s share of goodwill = $400,000 1/4 = $100,000
(b) Partners’ current accounts are used to record recurrent items such as the profit or loss shared, the
amount of drawings made, the interest on capital, the interest on drawings and partners’ salaries.
(c)
Realisation
$ $ $
Premises ($958,000 $47,000) 911,000 Capital: Ivy (premises) ($911,000 110%) 1,002,100
Equipment ($315,700 $57,600) 258,100 Capital: Tony (inventory) ($117,050 80%) 93,640
Goodwill 400,000 Bank — Equipment 210,800
Inventory 117,050 Capital: Ivy (trade receivables) ($200,100 90%) 180,090
Trade receivables 200,100 Trade payables — Discounts received ($95,700 5%) 4,785
Bank — Dissolution expenses 17,500 Loss on realisation —
Capital: Ivy (3/5) 247,401
Capital: Gary (1/5) 82,467
Capital: Tony (1/5) 82,467 412,335
1,903,750 1,903,750
Capital
Ivy Gary Tony Ivy Gary Tony
$ $ $ $ $ $
Realisation - Premises 1,002,100 — — Balances b/f 1,312,500 320,000 250,000
Realisation - Inventory — — 93,640 Current (W2) 295,100 — —
Realisation - Trade receivables 180,090 — — Bank — 20,000 —
Share of loss 247,401 82,467 82,467 Capital: Ivy (3/4) — 48,275 —
Current (W2) — 321,900 54,400 Tony (1/4) — 16,092 —
Capital: Gary 48,275 — 16,092
Bank — Final settlement 129,734 — 3,401
1,607,600 404,367 250,000 1,607,600 404,367 250,000
7 (a)
Revaluation
$ $ $
Inventory 18,000 Motor vehicle 55,000
Profit on revaluation
Capital – Abby (2/5) 14,800
–Billy (1/5) 7,400
–Cathy (2/5) 14,800 37,000
55,000 55,000
(b)
Capital
Abby Billy Cathy Abby Billy Cathy
$ $ $ $ $ $
Goodwill 13,250 — 26,500 Balances b/d 400,000 350,000 400,000
Current (Balance fig) 17,450 32,860 4,200 Goodwill 15,900 7,950 15,900
Loan from Billy — 592,490 — Revaluation profit 14,800 7,400 14,800
Balances c/d 400,000 — 400,000 Loan from Billy — 260,000 —
430,700 625,350 493,000 430,700 625,350 430,700
(c)
Current
Abby Billy Cathy Abby Billy Cathy
$ $ $ $ $ $
Balances b/d — 30,000 — Balances b/d 50,000 — 20,000
Drawings 15,000 16,000 8,000 Salary 30,000 19,000 10,000
Share of loss (W1) 11,720 5,860 11,720 Capital 17,450 32,860 4,200
Balances c/d 70,730 — 14,480
97,450 51,860 34,200 97,450 51,860 34,200
3 (a)
Realization
$ $ $
Motor vehicle (108,000 18,000) 90,000 Capital – Chan 18,000
Inventory 27,800 Accounts payable – liable by Chan 27,200
Prepaid rates 500 Capital – Ng 24,980
Accounts receivable 42,000 Bank (42,000 – 1,200 – 3,000) 37,800
Loss on realization –
Capital: Ng (1/3) 17,440
Capital: Chan (1/3) 17,440
Capital: Wong (1/3) 17,440 52,320
160,300 160,300
(b)
Capital
Ng Chan Wong Ng Chan Wong
$ $ $ $ $ $
Realisation 24,980 18,000 — Balances b/d 50,000 30,000 20,000
Realization – Loss 17,440 17,440 17,440 Current 18,250 18,750 —
Current — — 4,000 Capital: Ng — Deficiency — — 720
Capital: Wong – Deficiency 720 720 — Capital: Chan Deficiency — — 720
Bank – Final settement 25,110 12,590 —
68,250 48,750 21,440 68,250 48,750 21,440
(a)
The Journal
Date Details Dr Cr
2012 $ $
Mar 31 Realisation 1,359,370
Premises 497,860
Equipment 282,110
Inventory 258,900
Accounts receivable 320,500
" 31 Capital: Tammy 620,000
Realisation — Premises 620,000
" 31 Capital: Roy 238,000
Realisation — Equipment 238,000
" 31 Bank 227,850
Realisation — Inventory 227,850
" 31 Bank ($320,500 $4,500 $6,000) 310,000
Realisation — Accounts receivable 310,000
Realisation — Commission ($310,000 5%) 15,500
Capital: Tammy 15,500
" 31 Accounts payable 281,560
Bank 253,404
Realisation — Discounts received ($281,560 10%) 28,156
" 31 Realisation — Dissolution costs 17,376
Bank 17,376
" 31 Realisation — Profit on realisation 31,760
Capital: Tammy ($31,760 4/5) 25,408
Capital: Roy ($31,760 1/5) 6,352
" 31 Capital: Tammy 260,448
Capital: Roy 41,148
Bank — Final settlement 219,300
(b)
Realisation
2012 $ $ 2012 $
Mar 31 Premises 497,860 Mar 31 Bank — Inventory 227,850
31 Equipment 282,110 31
" " — Accounts receivable 310,000
31 Inventory 258,900 31 Capital: Tammy —Premises taken over 620,000
" "
31 Accounts receivable 320,500 31 Capital: Roy — Equipment taken over 238,000
" "
31 Capital: Tammy — Commission 15,500 31 Discounts received 28,156
" "
31 Bank — Dissolution costs 17,376
"
31 Profit on realisation —
"
Capital: Tammy (4/5) 25,408
Capital: Roy (1/5) 6,352 31,760
1,424,006 1,424,006
(c)
Capital
(b)
Bank
$ $
Balance b/f 367,000 Realisation dissolution expense 38,000
Realisation Furniture & fittings 59,400 Bank loan 54,000
Accounts receivable 468,800 Accounts payable (670,000 x 40%) 268,000
Capital Bob 77,600 Capital Alan 444,000
Carl 168,800
972,800 972,800
(c)
Capital
Alan Bob Carl Alan Bob Carl
$ $ $ $ $ $
Current account — — 25,000 Balances b/d 336,000 336,000 168,000
RealisationAlan 73,600 — — Current account 250,000 50,800 —
Bob — 400,000 — Loan — 4,000 60,000
Share of loss: 68,400 68,400 34,200 Bank — 77,600 —
Bank 444,000 — 168,800
586,000 468,400 228,000 586,000 468,400 228,000
(a)
Capital
Ron Sue Tim Ron Sue Tim
$ $ $ $ $ $
Share of loss (3:2) 8,550 5,700 — Balances b/d 200,000 150,000 —
Goodwill (3:3:2) 67,500 67,500 45,000 Goodwill (3:2) 108,000 72,000 —
Revaluation loss 1,110 740 — Creditors — — 48,000
Balances c/d 230,840 148,060 81,000 Stock — — 33,000
Bank — — 45,000
308,000 222,000 126,000 308,000 222,000 126,000
(b)
Statement to show the calculation of working capital as at 1 January 2010
$ $
Current assets
Stock ($24,500 + $33,000) 57,500
Debtors ($27,000 $1,350) 25,650
83,150
Less: Current liabilities
Creditors ($60,000 x 20%) 12,000
Accrued interest ($90,000x10%x7/12) 5,250
Bank overdraft ($59,300$45,000) 14,300 31,550
Working capital 51,600
HKCEE (2009, 4) (Accounting for partnership)
(a)
Revaluation
$ $
Motor vehicles ($430,000 x 20%) 86,000 Equipment 20,000
Stock ($40,000 – $35,000) 5,000 Revaluation loss
Provision for bad debts ($38,500 x 2%) 770 Ivan (2/5) 28,708
Joe (3/5) 43,062 71,770
91,770 91,770
(b)
Journal
Details Dr Cr
$ $
(1) Cash ($200,000 + $50,000) 250,000
Capital – Ivan 30,000
Capital – Joe 80,000
Capital – Kerry 200,000
(2) Cash 200,000
Capital – Ivan 30,000
Capital – Joe 80,000
Capital – Kerry 150,000
(3) Motor vehicles 120,000
Stock 80,000
Capital – Kerry 200,000
HKCEE (2008, 6) (Accounting for partnership)
(a)
Capital
Dave Eva Fred Dave Eva Fred
$ $ $ $ $ $
Goodwill (2:1:1) 30,000 15,000 15,000 Balances b/d 300,000 63,000 —
Capital – Fred 75,000 — — Goodwill (2:1) 40,000 20,000 —
Current — 48,000 — Capital – Dave — — 75,000
Balances c/d 261,600 20,000 100,000 Cash ($25,000 + $15,000) — — 40,000
Current 26,600 — —
366,600 83,000 115,000 366,600 83,000 115,000
(b)
Realisation
$ $ $
Office equipment ($202,000$20,200) 181,800 CapitalFred ($5,000 x 8) 40,000
Motor vehicles ($156,000$21,000) 135,000 CapitalDave ($135,000 x 90%) 121,500
Stock 42,000 BankOffice equipment 200,000
Debtors 57,000 debtors ($57,000$200) 56,800
CapitalDave (transportation expenses) 2,600 Creditors – discounts received ($18,000 x 5%) 900
Share of profit
Dave (2/4) 400
Eva (1/4) 200
Fred (1/4) 200 800
419,200 419,200
(c)
Capital
Dave Eva Fred Dave Eva Fred
$ $ $ $ $ $
P&L App – net loss Balances b/d 261,000 20,000 100,000
($88,000 – $60,000) 74,000 37,000 37,000 P&L App –
Realisation – stock — — 40,000 partner’s salaries — — 40,000
Realisation – motor vehicles 121,500 — — Realisation expense 2,600 — —
Share of deficiency (2 : 1) 11,200 — 5,600 Realisation profit 400 200 200
Bank 57,900 — 57,600 Deficiency — 16,800 —
264,600 37,000 140,200 264,600 37,000 140,200
HKCEE (2007, 6) (Cost Accounting and Accounting for partnership)
(a)
Ernest and Fred
Manufacturing account for the year ended 31 March 2007
$ $
Opening stock 81,100
Add: Purchases ($1,005,600 + $5,200) 1,010,800
Carriage inwards 19,020 1,029,820
1,110,920
Less Closing stock 67,490
Raw materials consumed 1,043,430
Direct labour ($200,000 – $2,500) 197,500
Prime cost 1,240,930
Factory overheads
Indirect labour 80,040
Salaries to factory supervisor 72,000
Repairs to machinery 5,320
Rent and rates [($275,800 + $4,200) x 1/4] 70,000
Depreciation – machinery ($751,500 x 20%) 150,300 377,660
1,618,590
Add Opening work-in-progress 46,610
1,665,200
Less Closing work-in-progress 52,140
Production cost of finished goods 1,613,060
(b)
Ernest and Fred
Trading and profit and loss and appropriation account for the year ended 31 March 2007
$ $
Sales ($2,741,200 + $1,000) 2,742,200
Less: Returns inwards 26,120
2,716,080
Less: Cost of goods sold:
Opening stock 163,750
Add Production cost of finished goods 1,613,060
1,776,810
Less Closing stock ($170,300$280) 170,020 1,606,790
Gross profit 1,109,290
Add: Gain on sale of office equipment {$30,000 – [$84,000 – $56,000 – ($84,000 - $56,000) x 10%]} 4,800
1,114,090
Less Administrative expenses 120,930
Selling expenses 92,690
Increase in provision for doubtful debts ($136,400 x 5% – $3,760) 3,060
Interest on 8% loan ($150,000 x 8% x 6/12) 6,000
Rent and rates [($275,800 + $4,200) x 3/4] 210,000
Carriage outwards 13,840
Depreciation – office equipment [($502,800 – $254,800) x 10%] 24,800
Salaries 143,200 614,520
Net profit 499,570
Less: Interest on capital
Ernest ($180,000 x 5%) 9,000
Fred ($150,000 x 5%) 7,500 16,500
Salaries – Ernest 80,000
– Fred 100,000 180,000
Bonus – Fred 50,000 246,500
253,070
Share of profit – Ernest (3/5) 151,842
– Fred(2/5) 101,228 253,070
(c)
Current
Ernest Fred Ernest Fred
$ $ $ $
Balance b/d 20,000 — Balances b/d — 30,000
Drawings (15000 5200), (12000 + 1000) 9,800 13,000 Interest on capital 9,000 7,500
Balance c/d 131,042 175,728 Bonus — 50,000
Share of profit 151,842 101,228
160,842 188,728 160,842 188,728
(a)
Realisation
$ $ $
Office equipment 325,000 Bank Office equipment (325,000 x 70%) 227,500
Furniture 72,900 Furniture 35,000
Motor vehicle 116,800 Stock (100,000 x 90%) 90,000
Stock 126,000 Debtors [(37,000 2,000) x 98%] 34,300
Debtors 37,000 Loan nn: motor vehicle 100,000
Capital Ben: transportation expenses 200 Capital Ben: Stock 9,750
Realisation expenses 2,100 Creditors – discounts received
(86,000 x 50% x 5%) 2,150
Share of loss:
Ann (2/7) 51,800
Ben (2/7) 51,800
Joe (3/7) 77,700 181,300
680,000 680,000
(b)
Bank
$ $
Realisation Office equipment 227,500 Balance b/f 120,400
Furniture 35,000 Creditors (86,000 – 2,150) 83,850
Stock (100,000 x 90%) 90,000 Realisation expenses 2,100
Debtors [(37,0002,000) x 98%] 34,300 Capital: Ann 134,150
Ben 46,300
386,800 386,800
(c)
Capital
Ann Ben Joe Ann Ben Joe
$ $ $ $ $ $
Current account — — 16,000 Balances b/d 160,000 95,000 80,000
Realisation Stock — 9,750 — Current account 32,800 19,500 —
Share of loss: 51,800 51,800 77,700 Realisation transportation — 200 —
Share of Joe’s deficiency (1 : 1) 6,850 6,850 — Deficiency — — 13,700
Bank 134,150 46,300 —
192,800 114,700 93,700 192,800 114,700 93,700
(a)
Revaluation
$ $ $
Motor vehicles 31,080 Goodwill 24,000
Stock 220 Equipment ($124,000 – $110,700) 13,300
Profit on revaluation –
Ann (3/6) 3,000
Bill (2/6) 2,000
Carl (1/6) 1,000 6,000
37,300 37,300
(b)
Capital
Ann Bill Carl Ann Bill Carl
$ $ $ $ $ $
Current — — 3,100 Balances b/d 128,000 126,000 54,000
Bank — — 51,900 Revaluation profit 3,000 2,000 1,000
Balances c/d 157,469 154,469 — Bank ($105,876 x 25%) 26,469 26,469 —
157,469 154,469 55,000 157,469 154,469 55,000
(c)
Realisation
$ $ $
Motor vehicle [($206,080 $31,080) x 80%] 140,000 Capital Ann: Motor vehicle 79,000
Equipment ($124,000 x 80%) 99,200 Capital Bill: Stock 58,000
Stock 64,000 Bank Motor vehicle ($60,900 x 90%) 54,810
Debtors 40,810 Equipment 100,000
Goodwill 24,000 Debtors ($40,810 - $2,750 - $500) 37,560
Creditors – discounts received ($464,000÷2x4%) 928
Share of loss:
Ann (1/2) 18,856
Bill (1/2) 18,856 37,712
368,010 368,010
(d)
Capital
Ann Bill Ann Bill
$ $ $ $
Loss on realization 18,856 18,856 Balances b/d 157,469 154,469
RealisationMotor vehicle taken over 79,000 — Current – Bill — 27,400
Stock — 58,000
Current – Ann 8,200 —
Bank 51,413 105,013
157,469 181,869 157,469 181,869
(b)
AB Trading Company
Statement of Financial Position as at 31 December 2011
$000 $000
ASSETS
Non-current assets
Property 260
Motor Van 100
Plant and equipment 120
480
Current assets
Inventories 192
Trade receivables 136
Bank ($120,000 - $52,000) 68 396
876
EQUITY AND LIABILITIES
Capital
Apple 250
Ben 150
Candy 100 500
Current
Apple 246
Ben 8 254
754
Current liabilities
Trade payables 90
Accruals 32 122
876
(b)
Current Accounts
Aaron Brian Chris Aaron Brian Chris
$ $ $ $ $ $
Balances b/f — — 18,000 Balances b/f 4,000 8,000 —
Balances c/f 82,725 57,200 8,275 P&L appropriation –
Interest on capital 3,000 2,050 2,700
Share of profit 70,725 47,150 23,575
Interest on loan 5,000 — —
82,725 57,200 26,275 82,725 57,200 26,275
Capital Accounts
Aaron Brian Chris Aaron Brian Chris
$ $ $ $ $ $
Goodwill (3 : 2 : 1) 105,000 70,00035,000 Balances b/f 60,000 41,000 54,000
Balances c/f 27,000 43,00091,000 Revaluation – Share of profit 2,000 2,000 2,000
Goodwill (1 : 1 : 1) 70,000 70,000 70,000
132,000 113,000 126,000 132,000 113,000 126,000
or
Capital Accounts
Aaron Brian Chris Aaron Brian Chris
$ $ $ $ $ $
Goodwill adj. 35,000 — — Balances b/f 60,000 41,000 54,000
Balances c/f 27,000 43,000 91,000 Revaluation – Share of profit 2,000 2,000 2,000
Goodwill adj. — — 35,000
62,000 43,000 91,000 62,000 43,000 91,000
Sea Limited
Income statement for the year ended 31 March 2011
$ $
Gross profit 869,000
Less: Expenses
Administrative expenses (590,000 – 5,600 ÷ 15 x 12) 585,520
Debenture interest (500,000 x 0.08) 40,000 625,520
Net profit 243,480
Less: Taxation 69,500
Net profit after tax 173,980
Add: Retained profit b/f 150,000
323,980
Less: Appropriations
Ordinary share dividend – interim (150,000 x 0.05) 7,500
– final (200,000 x 0.1) 20,000
Preference shares dividend (0.06 x 50,000 x 2) 6,000
Discount on debentures (500,000 x 0.02 ÷ 5) 2,000 35,500
Retained profits c/f 288,480
HKET Mock (9, 2011) (Issue of shares and debentures)
(a)
Journal Debit Credit
$ $
(i) (1) Bank (1,000,000 x $105 x 100%) 105,000,000
Ordinary share applicants 105,000,000
(2) Ordinary share applicants 105,000,000
Ordinary share capital (1,000,000 x $100) 100,000,000
Share premium (1,000,000 x $5) 5,000,000
(ii) (1) Bank (1,000,000 x $105 x 80%) 84,000,000
Ordinary share applicants 84,000,000
(2) Ordinary share applicants 84,000,000
Ordinary share capital (1,000,000 x $100 x 80%) 80,000,000
Share premium (1,000,000 x $5 x 80%) 4,000,000
(iii) (1) Bank (1,000,000 x $100 x 105%) 105,000,000
Ordinary share applicants 105,000,000
(2) Ordinary share applicants 100,000,000
Ordinary share capital (1,000,000 x $100) 100,000,000
(3) Ordinary share applicants 5,000,000
Bank (1,000,000 x $100 x 5%) 5,000,000
(iv) (1) Bank (1,000,000 x $100 x 90%) 90,000,000
Ordinary share applicants 90,000,000
(2) Ordinary share applicants 90,000,000
Ordinary share capital (1,000,000 x $100 x 90%) 90,000,000
(v) (1) Bank (1,000,000 x $95 x 120%) 114,000,000
Ordinary share applicants 114,000,000
(2) Ordinary share applicants 95,000,000
Share discount (1,000,000 x $5) 5,000,000
Ordinary share capital (1,000,000 x $100) 100,000,000
(3) Ordinary share applicants 19,000,000
Bank (1,000,000 x $95 x 20%) 19,000,000
(vi) (1) Bank (1,000,000 x $95 x 100%) 95,000,000
Ordinary share applicants 95,000,000
(2) Ordinary share applicants 95,000,000
Share discount (1,000,000 x $5) 5,000,000
Ordinary share capital (1,000,000 x $100) 100,000,000
(d) Shareholder Mr. Lee suggests to issue preference shares which can solve what shareholder Mr. Chan
worried, because preference shareholders have no voting right.
(a)
Bank
2012 $ 2012 $
Apr 25 Debenture applicants May 1 Debenture applicants — Refund
($700,000 105%) 735,000 ($200,000 105%) 210,000
Debenture Applicants
2012 $ 2012 $
May 1 8% debentures 500,000 Apr 25 Bank 735,000
" 1 Debenture premium ($500,000 5%) 25,000
" 1 Bank — Refund 210,000
735,000 735,000
8% Debentures
2012 $
May 1 Debenture applicants 500,000
Debenture Premium
2012 $
May 1 Debenture applicants 25,000
(c)
Everest Ltd
$
Non-current liabilities
8% debentures {$500,000 + [($25,000 ($25,000 20 8/12)]} 524,167
AAT 2011 (Pilot Paper 2, 8) (Issue of shares and debentures)
8 (a)
Date The Journal Dr Cr
2010 $ $
Jun 15 Bank (325,000 x $1.4) 455,000
Ordinary shares applicants 455,000
Jul 7 Ordinary shares applicants 175,000
Bank (125,000 x $1.4) 175,000
Jul 8 Ordinary shares applicants 280,000
Ordinary shares capital (200,000 x $1.0) 200,000
Share premium (200,000 x $0.4) 80,000
Oct 20 Bank 500,000
12% Debentures, repayable in 2020 500,000
(b)
HNH Limited
Statement of Financial Position as at 31 December 2010 (extracted)
Authorised Capital $
1,000,000 ordinary shares of $1.00 each 1,000,000
Equity
760,000 ordinary shares of $1.00 each 760,000
Share premium ($100,000 + $80,000) 180,000
940,000
Non-current liabilities
10% debentures, repayable in 2017 140,000
12% debentures, repayable in 2020 500,000
640,000
(c) Debt-to-equity before financing = Total liabilities / Owners’ equity before financing
= $140,000 / ($560,000 + $100,000)
= 21.21%
Debt-to-equity after financing = Total liabilities / Owners’ equity after financing
= $640,000 / ($760,000 + $180,000)
= 68.09%
The ratio measures the size of non-current liabilities relative to owners’ equity. Refer to HNH Limited,
the ratio is high after financing means that the company relies more on debt financing instead of
equity financing.
(c) — Profitability: Debenture interest is deducted from earnings and hence will result in a smaller net
profit. Ordinary dividend is only a profit appropriation item.
— Solvency: A larger amount of non-current liabilities will result in higher gearing, causing financial
instability.
(a) (2)
Dragon Ltd
Statement of Financial Position as at 31 December 2011
$
ASSETS
Non-current assets
Property, plant and equipment [(4,800,000 – 726,000) – (1,240,000 – 726,000)] 3,560,000
Current assets
Inventory 545,000
Trade receivables (716,400 – 35,820) 680,580
Cash at bank (760,800 + 3,600,000 + 900,000 – 225,000 – 9,000) 5,026,800
6,252,380
Total assets 9,812,380
Non-current liabilities
2% Debentures 900,000
Current liabilities
Trade payables (691,500 234,375) 457,125
Accrued expenses 1,500
458,625
(b) Reasons:
— Ratios may not reflect the reality of a business as accounting figures are not adjusted for
price-level changes.
— Analysis may not be comprehensive as only transactions expressed in monetary terms are included
in the financial statements, while qualitative information is ignored.
— Short run fluctuations of the company may be hidden through window dressing.
(2 marks for each relevant reason, max. 4 marks)
HKDSE Sample 1 (Paper 2A, 6) (Limited company and Correction Errors)
(a)
Journal
Debit Credit
$ $
(i) (1) Bank 16,120
Profit and loss: overdraft interest 80,060
Profit and loss: dividend income 80,060
(2) Deposit on acquisition of motor vehicle 10,000
Motor vehicles 10,000
Accumulated depreciation – motor vehicles ($10,000 x 25%) 2,500
Profit and loss: depreciation – motor vehicles 2,500
(ii) Profit and loss: insurance 1,300
Suspense 1,300
Rates prepaid 5,500
Suspense 5,500
(iii) Profit and loss: bad debts 10,800
Account receivables 10,800
Allowance for doubtful account 540
Profit and loss 540
(iv) Profit and loss 10,000
Inventories 10,000
(b)
Healthy Food Company
Statement of financial position as at 31 December 20X6
$ $
ASSETS
Non-current assets
Office machinery 148,000
Less: Accumulated depreciation 45,300
102,700
Current assets
Inventories ($127,600$10,000) 117,600
Account receivables, net ($85,500$10,800$540) 75,240
Deposit (re: motor vehicle) 10,000
Rates prepaid 2,750
205,590
Total Assets 308,290
(ii)
Oscar Ltd
Statement of Financial Position as at 30 June 2014
$ $ $
Accumulated Net book
Non-current assets Cost depreciation value
Plant and machinery 3,882,000 1,759,200* 2,122,800
Motor vehicles 856,000 380,080** 475,920
4,738,000 2,139,280 2,598,720
Current assets
Inventory 349,900
Trade receivables 678,000
Less Allowance for doubtful debts ($678,000 2%) 13,560 664,440
Prepaid expenses 9,000
Accrued revenue 5,000
Cash at bank 2,181,891
3,210,231
Less Current liabilities:
Trade payables 355,000
Accrued expenses [$3,600 + ($200,000 5% 1/2) + ($100,000 5% 3/12)] 9,850
Tax payable 145,000 509,850
Net current assets 2,700,381
5,904,101
Less Non-current liabilities:
5% debentures ($200,000 + $100,000) 300,000
5,604,101
Financed by:
Capital and reserves
Preference share capital [$1,000,000 + (150,000 $1)] 1,150,000
Ordinary share capital 3,000,000
Share premium [$250,000 + (150,000 $0.8)] 370,000
General reserve ($350,000 + $40,000) 390,000
Retained earnings 539,601
Proposed dividends ($34,500 + $120,000) 154,500
5,604,101
*
$982,800 + $776,400 = $1,759,200
**
$327,200 + $52,880 = $380,080
(b) A reserve is an amount set aside out of profits that is not used to meet any liability. Thus, a reserve is
not a future economic obligation. It is actually part of the undistributed profits of the business and
belongs to shareholders.
A provision is a liability of uncertain timing or amount. This means the business has a present
obligation arising from a past event, but the timing or amount of expenditure required for
settlement has to be estimated.
(b)
Aurora Ltd
Balance Sheet as at 31 October 2012
$ $ $
Accumulated Net book
Non-current assets Cost depreciation value
Premises 3,346,880 W1 392,094 2,954,786
Machinery and equipment 1,625,400 W1 305,622 1,319,778
4,972,280 697,716 4,274,564
Current assets
Inventory 133,975
Accounts receivable ($609,686 $7,866) 601,820
Less Allowance for doubtful accounts ($601,820 5%) (30,091) 571,729
Prepayments 12,895
Bank 287,545
1,006,144
Less Current liabilities
Accounts payable 265,098
Accruals [($121,600 $60,800) + ($12,000 4/12)] 64,800
Tax payable 57,931 (387,829)
Net current assets 618,315
4,892,879
Financed by:
Capital and reserves
Ordinary share capital 2,300,000
Share premium 345,000
General reserve ($268,300 + $38,000) 306,300
Retained profits 352,579
Proposed dividend 69,000
3,372,879
Non-current liabilities
8% debentures 1,520,000
4,892,879
Workings:
Debenture interest under Proposal 1 = ($1,520,000 8%) + ($1,500,000 10%) = $271,600
Debenture interest under Proposal 2 = ($1,520,000 8%) + ($750,000 10%) = $196,600
(d) Return on shareholders’ equity:
Proposal 1 Proposal 2
$ $
Profit after tax (A) 422,720 482,720
Share capital and reserves (Workings) (B) 3,795,599 4,605,599
Return on shareholders’ equity (A) (B) 11.14% 10.48%
Proposal 1 would yield a higher return on shareholders’ equity (11.14% vs. 10.48%).
Workings:
Share capital and reserves under Proposal 1 = $3,372,879 + $422,720 = $3,795,599
Share capital and reserves under Proposal 2 = $3,372,879 + 482,720 + (60,000 $10 125%) = $4,605,599
Proposal 1 would give rise to a higher debt ratio (50.26% vs. 39.2%).
W1:
Total liabilities under Proposal 1= $387,829 + $1,520,000 + $1,500,000 = $3,407,829
Total liabilities under Proposal 2 = $387,829 + $1,520,000 + $750,000 = $2,657,829
W2:
Total assets under Proposal 1 = $4,274,564 + $1,006,144 + $1,500,000 = $6,780,708
Total assets under Proposal 2 = $6,780,708
A high debt ratio means the company is highly geared. The higher the gearing, the more risky the
company is considered to be.
A company with high gearing is more vulnerable to downturns in the business cycle as it has to
continue paying interest periodically and repay the loan principal on maturity whether the
business is profitable or not.
(b)
Wealthy Limited
Trading and profit and loss appropriation account for the year ended 31 December 2011
$ $
Sales 9,500,000
Less: Appropriations:
Transfer to general reserve 300,000
Share dividend: Preference share ($2,000,000 x 8%) 160,000
Ordinary share ($5,000,000 x 0.2) 1,000,000 1,460,000
Retained profits carried forward 401,000
(c)
Wealthy Limited
Statement of financial position as at 31 December 2011
$ $ $
Accumulated Net book
Non-current assets Cost depreciation value
Vehicle 300,000 56,000 244,000
Furniture & fittings 800,000 80,000 720,000
1,100,000 136,000 964,000
Current assets
Inventory 680,000
Accounts receivable 3,500,000
Less Allowance for doubtful accounts ($3,500,000 x 1%) 35,000 3,465,000
Prepaid rental expense 75,000
Bank 7,252,500
11,472,500
(b)
HNH Limited
Statement of Financial Position as at 31 December 2010 (extracted)
Authorised Capital $
1,000,000 ordinary shares of $1.00 each 1,000,000
Equity
760,000 ordinary shares of $1.00 each 760,000
Share premium ($100,000 + $80,000) 180,000
940,000
Non-current liabilities
10% debentures, repayable in 2017 140,000
12% debentures, repayable in 2020 500,000
640,000
(c) Debt-to-equity before financing = Total liabilities / Owners’ equity before financing
= $140,000 / ($560,000 + $100,000)
= 21.21%
Debt-to-equity after financing = Total liabilities / Owners’ equity after financing
= $640,000 / ($760,000 + $180,000)
= 68.09%
The ratio measures the size of non-current liabilities relative to owners’ equity. Refer to HNH Limited,
the ratio is high after financing means that the company relies more on debt financing instead of
equity financing.
(a)
Fatima Limited
Trading and profit and loss and appropriation account for the year ended 31 December 2009
$ $
Sales ($4,270,000$900) 4,269,100
Less: Sales returns 67,000
4,202,100
Less: Cost of goods sold:
Opening stock 182,200
Add Purchases 1,083,000
Carriage inwards 13,600
1,278,800
Less Purchases returns 10,000
1,268,800
Less Closing stock ($204,350$10,000) 194,350 1,074,450
Gross profit 3,127,650
Interest income ($100,000 x 5% x 1/2) 2,500
3,130,150
Less Expenses
Bad debts 57,680
Selling and distribution expenses ($401,600$3,600) 398,000
Administrative expenses ($264,200 + $5,200) 269,400
Salaries 505,000
Rent and rates 314,000
Loss on sale of motor vehicle (W1) 21,400
Depreciation – motor vehicle (W2) 174,400
Depreciation – office equipment ($3,590,000 x 25%) 897,500 2,637,380
Net profit 492,770
Less: Appropriations
Transfer to general reserve 200,000
Ordinary dividend – paid 50,000 250,000
Retained profits for the year 242,770
(b)
Fatima Limited
Balance sheet as at 31 December 2009
$ $ $
Fixed Assets
Motor vehicles ($1,300,000$120,000) 1,180,000
Less: Accumulated depreciation (W3) 552,800 627,200
Office equipment 3,590,000
Less: Accumulated depreciation ($948,000 + $897,500) 1,845,500 1,744,500
2,371,700
Current Assets
Stock 194,350
Trade debtors ($798,400$900) 797,500
Accrued interest income 2,500
Prepayment 3,600
5% bank fixed deposit 100,000
Cash at bank 85,320
1,183,270
Less: Current Liabilities
Trade creditors ($821,200$10,000) 811,200
Accruals ($3,000 + 5,200) 8,200
Share subscription refundable ($2.20 x 20,000) 44,000 863,400
Working capital 319,870
2,691,570
Financed by:
Share Capital
800,000 ordinary shares of $2 each, fully paid 1,600,000
Reserves
Share premium ($151,300 + $300,000x0.2) 211,300
General reserve ($140,000 + $200,000) 340,000
Retained profits ($297,500 + $242,770) 540,270 1,091,570
2,691,570
(b)
Lee Leung Manufacturing Company Limited
Trading and profit and loss and appropriation account for the year ended 31 December 2008
$ $
Sales 2,886,000
Less: Cost of goods sold:
Opening stock 163,750
Add Production cost of finished goods 1,964,090
2,127,840
Less Closing stock 148,510 1,979,330
Gross profit 906,670
Less Expenses
Salaries 189,750
Rent and rates ($297,600 x 1/3) 99,200
Administrative expenses ($210,520 + $5,000) 215,520
Selling and distribution expenses ($109,020 – $3,000) 106,020
Provision for doubtful debts ($11,900 – $7,100) 4,800
Loan interest ($120,000 x 8% x 8/12 + $240,000 x 8%) 25,600
Debenture interest ($180,000 x 6% x 9/12) 8,100
Depreciation – office furniture and fittings ($150,000 x 20%) 30,000 678,990
Net profit 227,680
Less: Appropriations
Transfer to general reserve 100,000
Ordinary dividend – paid 21,000
– proposed [($380,000 / $2 + 100,000) x $0.15] 43,500 164,500
Retained profits for the year 63,180
(c)
Lee Leung Manufacturing Company Limited
Balance Sheet as at 31 December 2008
$ $ $
Accumulated Net book
Fixed Assets Cost depreciation value
Machinery 1,025,000 523,400 501,600
Office furniture and fittings 150,000 93,700 56,300
1,175,000 617,100 557,900
Current assets
Stock: Raw materials 140,000
Work-in-progress 47,100
Finished goods 148,510 335,610
Trade debtors 238,000
Less: Provision for doubtful debts 11,900 226,100
Prepayment 3,000
Cash at bank 442,210
1,006,920
Less Current Liabilities
Trade creditors 108,900
Accruals ($5,000 + $15,600 + $8,100) 28,700
8% loan 120,000 257,600
Working capital 749,320
1,307,220
Financed by:
Share Capital
290,000 ordinary shares of $2 each, fully paid 580,000
Reserves
General reserve ($86,000 + $100,000) 186,000
Retained profits ($48,140 + $63,180) 111,320
Share premium ($40,000 + $50,000 - $3,600) 86,400
Proposed dividend 43,500 427,220
1,007,220
Long-term Liabilities
8% loan 120,000
6% debenture 180,000 300,000
1,307,220
(a)
Trading and profit and loss and appropriation account for the year ended 31 December 2007
$ $ $
Sales 3,837,000
Less: Sales returns 45,520
3,791,480
Less: Cost of goods sold:
Opening stock 152,400
Add Purchases 1,068,000
Carriage inwards 11,500 1,079,500
1,231,900
Less Closing stock [$157,500$100] 157,400 1,074,500
Gross profit 2,716,980
Interest income 5,000
2,721,980
Less Expenses
Bad debts 49,800
Selling and distribution expenses 597,060
Administrative expenses 106,000
Wages and salaries ($545,000 + $10,000) 555,000
Rent and rates ($230,000 – $2,900) 227,100
Debenture interest ($600,000 x 5% x 3/12) 7,500
Depreciation – furniture and equipment [($4,900,000 – $643,000)x20%] 851,400 2,393,860
Net profit 328,120
Less Appropriations
Transfer to general reserve 150,000
Dividend paid 85,500 235,500
Retained profit for the year 92,620
(b)
Balance sheet as at 31 December 2007
$ $ $
Fixed Assets
Furniture and equipment 4,900,000
Less: Accumulated depreciation ($643,000 + $851,400) 1,494,400
3,405,600
Current Assets
Stock 157,400
Trade debtors ($1,225,000$100,000 + $5,000) 1,130,000
Deposit on future purchases 100,000
Prepaid expenses 2,900
Cash at bank 303,720
1,694,020
Less: Current Liabilities
Trade creditors 708,000
Accrued expenses 10,000
Interest payable 7,500
Share subscription refundable (500,000400,000)x$2 200,000 925,500
Working capital 768,520
4,174,120
Financed by:
Share Capital
2,400,000 ordinary shares of $1 each, fully paid 2,400,000
Reserves
Share premium ($166,700 + $400,000 x $1) 566,700
General reserve ($140,000 + $150,000) 290,000
Retained profits ($92,620 + $224,800) 317,420 1,174,120
Shareholders’ fund 3,574,120
Long-term liabilities
5% Debentures 600,000
4,174,120
(b)
Journal
Debit Credit
$ $
(i) Suspense 1,600
Interest income 800
Prepaid selling expenses 800
(ii) Bank (Cash) 40
Debtors 4,844
Sales 4,884
(iii) Administrative expenses 300
Creditors 300
(iv) Administrative expenses 16,000
Plant and equipment 10,600
Suspense 5,400
Accumulated depreciation – plant and equipment 2,120
Administrative expenses ($10,600 x 20%) 2,120
(v) Stock 6,000
Cost of goods sold 6,000
(vi) Interim dividend 12,000
Deposits received from debtors 12,000
(vii) Share application money 70,000
Ordinary share capital 40,000
Share premium ($0.4 x 40,000) 16,000
Bank ($1.4 x 10,000) 14,000
(c)
Bamboo Limited
Balance Sheet as at 31 March 2007
$ $ $
Fixed assets
Plant and equipment (692,460 – 10,600) 681,860
Less: Accumulated depreciation (246,540 – 2,120) 244,420
437,440
Current assets
Stock (22,100 + 6,000) 28,100
Debtors (105,690 + 4,844) 110,534
Prepaid selling expenses (8,000 – 800) 7,200
Cash at bank (47,400 + 40 – 14,000) 33,440
179,274
Less Current Liabilities
Creditors (96,710 + 300) 97,010
Deposits received from debtors (16,000 + 12,000 ) 28,000 125,010
Working capital 54,264
491,704
Capital and reserves
Ordinary share capital (180,000 + 40,000) 220,000
Share premium 16,000
Retained profits (workings) 135,704
371,704
Long-term liabilities
Bank loan 120,000
491,704
Workings:
$
Sales (985,000 + 4,884) 989,884
Cost of goods sold (538,600 – 6,000) (532,600)
Gross profit 457,284
Interest income 800
Administrative expenses (123,700 + 16,000 – 2,120 + 300) (137,880)
Selling expenses (187,500)
Interest on bank loan (5,000)
Net profit for the year 127,704
Retained profits as at 1 April 2006 20,000
Interim dividend (12,000)
Retained profits as at 31 March 2007 135,704
(b)
Balance sheet as at 31 March 2005
$ $ $
Fixed assets Cost Depreciation Net
Office equipment 4,500,000 1,612,500 2,887,500
Furniture and fittings 4,950,000 2,340,000 2,610,000
9,450,000 3,952,500 5,497,500
Current assets
Stock 175,075
Trade debtors ($916,750$72,000) 909,550
Less: Provision for doubtful debts [($916,750$7,200) x 4%] 36,382 873,168
Prepaid rates 8,900
Cash at bank ($305,790 + $14,000) 319,790
1,376,933
Less: Current Liabilities
Trade creditors 862,300
Accruals 3,000 865,300
Working capital 511,633
6,009,133
Financed by:
Share capital
2,300,000 Ordinary shares of $2 each, fully paid 4,600,000
Reserves
Share premium ($187,500 + $500,000) 687,500
General reserve ($157,500 + $100,000) 257,500
Retained profit 349,133
Proposed dividend 115,000 1,409,133
Shareholders’ fund 6,009,133
Accounting Ratio
HKDSE (2013, 7) (Accounting ratio)
2011 2012
(i) Current assets Current assets
= 37,500 + 32,020 + 200 + 79,680 = (85,864 + 14,000) + 500 + 162,936
= $149,400 = $263,300
Current liabilities = 23,100 + 43,300 Current liabilities = 60,000 + 100,200 + 15,000
= $66,400 = $175,200
Current ratio = $149,400/$66,400 Current ratio = $263,300/$175,200
= 2.25 : 1 = 1.50 : 1
(ii) Liquid ratio = ($149,400 $79,680)/$66,400 Liquid ratio = ($263,300 $162,936)/ $175,200
= $69,720/$66,400 = $100,364/$175,200
= 1.05 : 1 = 0.57 : 1
(iii) Average accounts receivables Average accounts receivables
= ($37,260 + $37,500)/2 = (37,500 + 85,864 + 14,000)/2
= $37,380 = $68,682
Net credit sales = $454,790 Net credit sales = $625,942 + $14,000 = $639,942
Days’ sales in accounts receivables Days’ sales in accounts receivables
= ($37,380/$454,790) x 365 = ($68,682 / $639,942) x 365
= 30.00 days = 39.17 days
(iv) Cost of goods sold Cost of goods sold
= $454,790$96,110 = $625,942 $230,191
= $358,680 = $395,751
Average inventory Average inventory
= ($88,320 + $79,680)/2 = ($79,680 + $162,936)/2
= $84,000 = $121,308
Inventory turnover Inventory turnover
= $358,680 / $84,000 = $395,751 / $121,308
= 4.27 times = 3.26 times
(v) Net profit = $115,000 $69,521 = $45,479 New Net Sales = 625,942 + 14,000 = 639,942
Net profit ratio New Gross profit = 639,942 395,751 = 244,191
= $45,479/$454,790 Extra gross profit = 244,191 $230,191 = 14,000
= 10.00%
Net profit = ($132,722 + $14,000 $115,000)
= $31,722
Net profit ratio = $31,722 /$639,942
= 4.96%
(vi) Earnings per share = $45,479/($155,000/$5) Earnings per share = $31,722/($155,000/$5)
= $1.47 per share = $1.02 per share
(a) (1) Trade receivables collection periods = (Average receivable / Net credit sales) x 12
= [($856,000 + $996,000) 2 / $10,186,000] x 12
= 1.1 months
(2) Cost of goods sold = Opening inventory + Purchases – Closing inventory
= 878,000 + 7,294,500 – 990,000
= 7,182,500
Inventory turnover = (Cost of goods sold / Average Inventory)
= [7,182,500 / (878,000 + 990,000) 2]
= [7,182,500 / 934,000]
= 7.7 times
(b)
Journal
2011 Debit Credit
December $ $
(i) Loan interest 5050
Accrued loan interest 5050
(ii) Accumulated depreciation – Motor vehicles 40 000
Cash 48 000
Motor vehicles 80 000
Profit and loss – Profit on disposal of motor vehicles 8 000
(c) Accrual concept
— Unpaid loan interest should be credited to accrued loan interest account to represent an increase
in current liability in 2011.
— The loan interest incurred should be debited in the profit and loss account as an increase in
operating expenses of 2011.
HKDSE (sample, 8) (Accounting ratio)
(a) (i) Net profit for the year vs net increase in cash and bank balances for the year:
— Net profit for the year is arrived at matching all expenses and revenues of a particular trading
period with adjustments of accruals and prepayments.
— Cash and bank balances represents the amount of cash in hand and on demand (net of cash
inflows and outflows).
— The business makes profit by converting cash into assets like accounts receivables, inventories,
investment, etc. and then converting such assets back into cash.
— A business wants to get hold of cash in the shortest possible time put to keep the least amount of
cash in hand so as to increase the number of trading cycles and hence the trading profits.
(ii) Bank balance in the cash book vs the bank statement balance as at 31 December 20X6:
— The cash book makes records from the company’s point of view. It debits all cash and cheques
deposited into the bank account, and credit bank charges and cheques drawn on payees.
— The transactions recorded in the bank statement are shown from the point of view of the bank, in
that payment are debited and receipts are credited.
— The balance in the bank statement rarely agree with the cash book balance of the same date:
The discrepancy may arise from:
Items arising from time differences e.g. cheques issued to suppliers not yet presented to the
bank for payment, deposits made by the company not yet credited by the bank
errors made by the bank or errors present in the cash book
(b) Gearing ratio = Debentures + Long-term loans + Preference share capital / Capital and reserves + Non-current liabilities
Alternative 1 : Gearing ratio = Preference share capital / Capital and reserves + New shares
= 1,500 / 5,100 + 1,800
= 21.74%
Alternative 2 : Gearing ratio = Preference share + Debentures / Capital and reserves + Debentures
= 1,500 + 1,800/ 5,100 + 1,800
= 47.83%
Alternative 3 : Gearing ratio = Preference share + Long-term loans / Capital and reserves + Long-term loans
= 1,500 + 1,440/ 5,100 + 1,440
= 44.95%
(c) Earnings per share = Profit after tax – Interest and Preference share dividend/ Number of shares issued
Alternative 1 : Earnings per share = Profit after tax – Preference share dividend/ Number of shares issued
= (3,600 – 180) / (200 + 100)
= $11.4 per share
Alternative 2 : Earnings per share = Profit after tax – Interest and Preference share dividend / Number of shares issued
= (3,600 – 144 180) / 200
= $16.38 per share
Alternative 2 : Earnings per share = Profit after tax – Interest and Preference share dividend / Number of shares issued
= (3,600 – 120 180) / 200
= $16.38 per share
Return to shareholders:
— Under all three alternatives, the return to long-term capital employed included preference dividend
and ordinary dividend.
— Both Alternatives 2 and 3 impose interest burden on the company and can weaken the company’s
profitability and liquidity position. Shareholders may suffer if the estimated profit is not attained.
— Based on the earning per share, ordinary shareholders will benefit from the highly geared position
under Alternatives 2 and 3.
(ii)
Billion Ltd
Balance Sheet as at 31 May 2013
$ $ $
Accumulated Net book
Non-current assets Cost depreciation value
Buildings 46,250,000 7,931,250 *
38,318,750
Machinery and equipment 40,635,000 7,640,550 **
32,994,450
86,885,000 15,771,800 71,313,200
Current assets
Inventory 3,335,000
Accounts receivable 14,678,940
Less Allowance for doubtful debts (1,283,940) 13,395,000
Prepayments 135,050
Bank 5,875,420
22,740,470
Less Current liabilities
Accounts payable 6,627,450
Accruals 289,000
Tax payable 3,286,720 (10,203,170)
Net current assets 12,537,300
83,850,500
Financed by:
Capital and reserves
Preference share capital 18,000,000
Ordinary share capital 37,500,000
Share premium 18,625,000
General reserve 2,000,000
Retained profits 5,145,500
Proposed dividends ($1,080,000 + $1,500,000) 2,580,000
83,850,500
(b) Windy Ltd is more profitable than Sunny Ltd, as indicated by a higher gross profit margin (62.1% vs.
49.05%) and a higher return on shareholders’ equity (38.05% vs. 21.29%).
Windy Ltd has a better liquidity position than Sunny Ltd, with a higher quick ratio (1.51 times vs. 1.14
times), a higher accounts receivable turnover (4.78 times vs. 4 times) and a higher accounts payable
turnover (3.2 times vs. 2.73 times).
Windy Ltd’s solvency position is similar to that of Sunny Ltd in terms of the debt ratio (53.78% vs.
53%).
I will recommend Sunny Ltd even though Windy Ltd is more profitable and has a better liquidity
position. The reason is because Windy Ltd’s shares are much more expensive. Windy Ltd has a
price-earnings ratio of 19.51 times versus Sunny Ltd’s 10.24 times (see Workings), that is, 90.53%
higher. But its return on shareholders’ equity is only 78.72% higher (38.05% vs. 21.29%). Sunny Ltd is
quite profitable, with a return on shareholders’ equity of 21.29%. It also has reasonable liquidity and
solvency positions. Therefore, Sunny Ltd is a more attractive investment than Windy Ltd.
(b) Return on long-term capital = Operating profit / (Share capital + Reserves + Non-current liabilities)
= $2,267,000 / ($7,800,000 + $6,660,000 + $4,380,000)
= 12.03%
(d) Months’ sales in accounts receivable = (Average account receivable / Net credit sales) x 12
= {[($7,654,000 + $7,464,000) 2] / $29,853,000} x 12
= 3.04 months
(h) Interest cover = Profit before interest and tax / Interest expense
= $2,267,000 $469,000
= 4.83 times
(i) Price-earnings ratio = Market price per share / Earning per share
= Market price per share / (Profit after tax Number of share issued)
= $4 / [$1,438,000 ($7,800,000 $2)]
= 10.81 times
(a) Contribution margin per unit = $ 770,000 / 4,000 = $192.5 per pair
Break-even point (calculate the units sold) = Fixed cost / Contribution margin per unit
= $370,000 / $192.5
= 1922.08
= 1,923 pairs
(b) Net profit ratio = Net profit / Net sales
= $400,000 / 1,230,000
= 32.52%
(c) Month’s sales in accounts receivable = (Average account receivable / Net credit sales) x 12
= {$450,000 / [1,230,000 x (1 – 20%)} x 12
= 5.49 months
(d) Let y be the unit price for each pair of sports shoes
4,000 y = Fixed cost + target net profit + variable cost
4,000 y = 370,000 + 400,000 (1+30%) + 460,000
4,000 y = 370,000 + 520,000 + 460,000
y = $ 337.5
Rocket Limited needs to reset the selling price to $ 337.5 for each pair of sports shoes so as to
achieve the target net profit.
(b)
Wealthy Limited
Trading and profit and loss appropriation account for the year ended 31 December 2011
$ $
Sales 9,500,000
Less: Appropriations:
Transfer to general reserve 300,000
Share dividend: Preference share ($2,000,000 x 8%) 160,000
Ordinary share ($5,000,000 x 0.2) 1,000,000 1,460,000
Retained profits carried forward 401,000
(c)
Wealthy Limited
Statement of financial position as at 31 December 2011
$ $ $
Accumulated Net book
Non-current assets Cost depreciation value
Vehicle 300,000 56,000 244,000
Furniture & fittings 800,000 80,000 720,000
1,100,000 136,000 964,000
Current assets
Inventory 680,000
Accounts receivable 3,500,000
Less Allowance for doubtful accounts ($3,500,000 x 1%) 35,000 3,465,000
Prepaid rental expense 75,000
Bank 7,252,500
11,472,500
(a)
Membership fee
$ $
Balance b/f 5,500 Balance b/f 3,000
Income and expenditure 90,000 Bank 84,000
Balance c/f 1,500 Membership fee write-off 2,500
Balance c/f 7,500
97,000 97,000
(b)
Macho Club
Trading account for the year ended 31 December 2007
$ $
Opening stock 6,320 Sales 48,200
Add: Purchases (W1) 27,900
34,220
Less: Closing stock 5,730
Cost of T-shirts sold 28,490
Commission on T-shirt sales 4,200
Income and expenditure: profit on sale of T-shirts 15,510
48,200 48,200
W1
Creditors
$ $
Cash/Bank 22,890 Balance b/d 8,970
Balance c/d 13,980 Purchases (balancing figure) 27,900
36,870 36,870
(c) (i) Stock turnover rate (in months) = (Average inventory / Cost of goods sold) x 12
Average inventory = ($6,320 + $5,730)/2 = $6,025
Cost of goods sold = $28,490
Stock turnover rate (in months) = ($6,025/$28,490) x 12 = 2.54 months
(ii) Average credit period received from trade creditors (in days) = (Average creditors / Net credit purchases) x 365
Average creditors = ($8,970 + $13,980)/2 = $11,475
Net credit purchases = 27,900
Average credit period received from trade creditors (in days) = ($11,475/$27,900) x 365 = 150.12 days
(c)
Calculation of shareholders’ fund as at 31 December 2005
$
Share capital
900,000 ordinary shares of $1 each (650,000 + 250,000) 900,000
Reserves
Share premium (75,000 + 125,000) 200,000
Retained profits [213,000 + (800,000 406,200 320,000)] 286,800
1,386,800
Retained profits
= Last year retained profit + Net profit this year
= Last year retained profit + (Sales – Cost of goods sold – Operating expenses)
(A) (a) Liquidity ratios measure how able is a firm to meet its current liabilities, how efficient is the company in
utilizing its funds and whether it can meet unexpected need for cash. It is to ensure that a firm can pay its
creditors and expenses whey they are due. This is important as otherwise the firm will have to close down.
(b) Profitability ratios measure the earnings and operating success of a firm within a given period of time. They
are always used to measure how effective the management is, operating and how efficient the
management is in utilizing the firm’s assets.
(b) Liquidity
The current ratio of the company increased from 1.93 : 1 in 2000 to 2.04 : 1 in 2001, which was approximate to
the ideal ratio of 2 : 1. It means that the company’s liquidity had slightly improved. It had a better short-term debts
meeting ability and it could meet its short-term debts with its current assets without any substantial loss or
inconvenience. The current assets were maintained at a reasonable level so that resources would not be left idle.
The quick ratio of the company increased from 1.01 : 1 in 2000 to 1.32 : 1 in 2001, which was higher than the
ideal ratio of 1 : 1. It means that the company’s liquidity had improved and it had a better immediate debt paying
ability. Even if all the creditors asked for immediate payments, the company could meet the obligations without
any substantial harm to the liquidity position of the company.
The debtors’ collection period decreased from 3.26 months in 2009 to 3.13 months in 2001. It might be due to a
slightly tighter credit policy of the company, or more attractive cash discounts of the company. As the debtors paid
their outstanding amount earlier, the company had more cash for daily operations.
The stock turnover rate of the company decreased from 3.02 times in 2000 to 2.62 times in 2001. The rate
indicates how frequent the company made sales. It means that the company was slower in selling the stock in
2001.
Profitability
The net profit ratio decreased from 10.07% in 2000 to 9.44% in 2001. It might be due to an increasing operating
cost, a less efficient cost control and an inefficient utilization of assets in generating sales, leading to a decrease in
the company’s profitability.
The return on capital employed decreased from 6.11% in 2000 to 5.70% in 2001. It might be due to a drop in the
net profit margin, decreasing the profitability of the company. It also indicates deteriorating management
effectiveness.
Incomplete records
HKDSE (2014, 6) (Incomplete)
(a)
Peter
Income statement for the year ended 31 December 2013
$ $
Sales (W1) 510,000
Less: Cost of goods sold
Opening inventory 75,000
Add: Purchases (W2) 450,000
525,000
Less: Inventory loss (289,000)
236,000
Less: Closing inventory (32,000) (204,000)
Gross profit ($510,000 x 60%) 306,000
Less: Expenses
Advertising expenses 8,000
Rent 37,200
Salaries 144,000
Depreciation – Office equipment (180,000 x 80% x 20%) 28,800 218,000
Net profit 88,000
W1
(Average trade receivables / Net credit sales) x 12 = The collection period of trade receivables
[(90,000 + 80,000) ÷ 2 / Net credit sales] x 12 = 2
(85,000 / Net credit sales) x 12 = 2
Net credit sales = $510,000
W2
(Net credit purchases / Average trade payables) = 9
[Net credit purchases / (18,000 + 32,000) ÷ 2] = 9
(Net credit purchases / 50,000) = 9
Net credit purchases = $450,000
Current Assets
Inventory 1 100 000
Trade receivables (W2) 300 000
Cash at bank (Balancing figure) 9 983 000
11 383 000
Less: Current Liabilities
Trade payables (W3) 600 000
Accrued administrative expenses ($270 000 x 1/3) 90,000 690 000
Net current assets 10 693 000
11 413 000
Less: Non-current Liabilities
Four-year bank loan (6%) 1 000 000
Five-year bank loan (4%) 800 000 1 800 000
9 613 000
Equity attributable to the owners of the company
Ordinary shares of $2 each, fully paid 4 000 000
Share premium 3 000 000
Retained profits ($2 000 000 (W1) + $613 000) 2 613 000
9 613 000
W2
The collection period of trade receivables = (Average trade receivables / Net credit sales) x 12
(Average trade receivables / Net credit sales) x 12 = 1
(Average trade receivables / 3 600 000) x 12 = 1
Average trade receivables = $300 000
W3
The settlement period of trade payables = (Average trade payables / Net credit purchases) x 12
(Average trade payables / Net credit purchases) x 12 = 3
(Average trade payables / $2 400 000) x 12 = 3
Average trade payables = $600 000
(b) Reasons:
— Ratios may not reflect the reality of a business as accounting figures are not adjusted for
price-level changes.
— Analysis may not be comprehensive as only transactions expressed in monetary terms are included
in the financial statements, while qualitative information is ignored.
— Short run fluctuations of the company may be hidden through window dressing.
(2 marks for each relevant reason, max. 4 marks)
$ $
Inventory as at 1 January 2014 176,500
Add Purchases, 1–15 January 2014 ($23,400 ‒ $400) (ii) 23,000
Returns inwards, 1–15 January 2014 at cost price ($1,500 ÷ 125%) (iv) 1,200 24,200
200,700
Less Sales, 1–15 January 2014 at cost price ($37,200 ÷ 125%) (iii) 29,760
Inventory overstated [($15 ‒ $3) 100] (v) 1,200
Drawings (vi) 2,000 32,960
Inventory as at 15 January 2014 167,740
Less Inventory not stolen 5,200
Inventory stolen on 15 January 2014 162,540
(b)
The Journal
Date Details Dr Cr
2014 $ $
Jan 15 Profit and loss — Inventory loss 162,540
Purchases 162,540
Mar 28 Bank ($162,540 1/2) 81,270
Profit and loss — Inventory loss 81,270
(b)
The Journal
Date Details Dr Cr
2012 $ $
Nov 5 Profit and loss — Inventory loss 224,360
Purchases 224,360
2013
Jun 10 AVA Insurance Ltd (other receivables) ($224,360 60%) 134,616
Profit and loss — Inventory loss 134,616
Accounts receivable
$ $
Balance b/f (36,480 ÷ 0.96) 38,000 Bank (W1) 7,103,000
Sales (Balancing figure) 7,146,500 Returns inwards 7,500
Discounts allowed 18,000
Balance c/f (53,760 ÷ 0.96) 56,000
7,184,500 7,184,500
Accounts receivable
$ $
Balance b/f (36,480 ÷ 0.96) 38,000 Bank (W1) 7,103,000
Sales (Balancing figure) 7,146,500 Returns inwards 7,500
Discounts allowed 18,000
Balance c/f (53,760 ÷ 0.96) 56,000
7,184,500 7,184,500
W1
Accounts payable
$ $
Bank 3,455,500 Balance b/d 245,000
Returns outwards 127,000 Purchases (Bal. fig) 3,820,300
Discounts received 9,500
Balance c/d 473,300
4,065,300 4,065,300
W2
Let y be the closing inventory.
Inventory turnover = Cost of goods sold / Average inventory
5.8 = ($4,278,300 – y) / [($585,000 + y) / 2]
5.8 x [($585,000 + y) / 2] = $4,278,300 – y
2.9 x ($585,000 + y) = $4,278,300 – y
$1,696,500 + 2.9y = $4,278,300 – y
3.9y = $2,581,800
y = $662,000
W3
Accounts receivable
$ $
Balance b/d 484,000 Bank 2,934,000
Sales 3,360,600 Bad debts 13,000
Returns inwards 210,600
Discounts allowed (Bal. fig) 16,000
Balance c/d (W4) 671,000
3,844,600 3,844,600
W4
Let y be the accounts receivable
Accounts receivables’ collection period = (average debtors / net sales) x 12
2.2 = {[($484,000 + y) / 2] / ($3,360,600 $210,600)} x 12
2.2 = {[($484,000 + y) / 2] / $3,150,000]} x 12
2.2 x $3,150,000 / 12 = ($484,000 + y) / 2
$577,500 = ($484,000 + y) / 2
$1,155,000 = $484,000 + y
y = $671,000
W5
At 31 March 2010:
Assets = ($700,000 - $180,000) + $585,000 + $484,000 + $240,000 = $1,829,000
Liabilities = $245,000 + $1,000 + $57,300 = $303,300
Capital + Reserves = Assets – Liabilities = $1,829,000 $303,300 = $1,525,700
Capital = Ordinary shares + Preference shares = 25,000 x $10 + (1,000,000 x 0.25 – 20,000) x $2 = $710,000
Reserves = share premium + general reserve + retained profits = $146,000 + 130,000 + retained profits
$1,525,700 = $710,000 + $146,000 + 130,000 + retained profits
Retained profits = $539,700
Dora Limited
Balance Sheet as at 31 March 2011
$ $ $
Non Current assets
Machinery (700,000 + 100,000) 800,000
Less Accumulated depreciation ($180,000 + $93,000) 273,000
527,000
Current assets
Inventory 662,000
Accounts receivable 671,000
Prepayments 10,000
Bank [240,000 + 4,325,455 (Receipts) – 3,824,560 (Payments)] 740,895
2,083,895
Less Current Liabilities
Accounts payable 473,300
Tax payable 81,250
Accrued share dividend (25,000 12,500) 12,500
Accrued debenture interest 2,000 569,050
Net Current assets 1,514,845
2,041,845
Financed by:
Capital and reserves
25,000 10% preference shares at $10 each 250,000
250,000 ordinary shares at $2 each 500,000
Share premium [$146,000 + ($44,000 – $2 x 20,000] 150,000
General reserve 130,000
Retained profits 911,845
1,941,845
Non-current liabilities
8% debenture 100,000
2,041,845
AAT 2011 (Paper 2, 9) (Incomplete records)
(a) (i)
Trade receivables
$ $
Balances b/f 67,260 Bank 488,270
Sales (balancing figure) 540,580 Cash 32,970
Discounts allowed 7,700
Balances c/f 78,900
607,840 607,840
(ii)
Trade payables
$ $
Bank 308,060 Balances b/f 43,540
Cash 17,870 Purchases (balancing figure) 343,230
Discounts received 5,960
Balances c/f 54,880
386,770 386,770
(iii)
Gigi Chan
Profit and Loss Account for the year ended 31 March 2010
$ $
Sales (part (i)) 540,580
Less: Cost of goods sold
Opening inventory 78,010
Add: Purchases (part (ii)) 343,230
421,240
Less: Closing inventory (balancing figure) (15,805) (405,435)
Gross profit ($540,580 x 25%) 135,145
Add: Discounts received 5,960
141,105
Less: Expenses
Discounts allowed 7,700
Other expenses ($24,770$1,360 + $3,280) 26,690 (34,390)
Net profit 106,715
(b) Average Inventory period (in days) = (Average inventory / Cost of goods sold) x 365
Average inventory = ($78,010 + $15,805) / 2 = $46,907.50
Average inventory period = ($46,907.50 / $405,435) x 365 = 42.23 = 42 days
Trade receivable collection period = (Average trade receivables / Net credit sales) x 365
Average trade receivables = ($67,260 + $78,900) / 2 = $73,080
Trade receivable collection period = ($73,080 / $540,580) x 365 = 49.34 = 49 days
Trade payable repayment period = (Average trade payables / Net credit purchases) x 365
Average trade payables = ($43,540 + $54,880) / 2 = $49,210
Trade payable repayment period = ($49,210 / $343,230) x 365 = 52.33 = 52 days
Gigi needs to take 42 days to sell her inventory in hand and takes 49 days for collecting money from
credit sales. That is a total of 91 days. However, she needs to make payment to her trade payables
within 52 days from the date of credit purchases. Hence, she may face a serious liquidity problem.
W1
Calculate cost of goods sold:
Cost of goods sold x (1 + 80%) = Sales
Cost of goods sold x 180% = $266,400
Cost of goods sold = $266,400 ÷ 180% = $148,000
W2
Debtors
$ $
Balances b/f 39,800 Bank 256,900
Sales 266,400 Discounts allowed (balancing figure) 300
Balances c/f (W3) 49,000
306,200 306,200
W3
Calculate closing debtors:
Credit period = (Average debtors / Net credit sales) x 12
2 = [($39,800 + closing debtors) ÷ 2 / $266,400] x 12
2 ÷ 12 = ($39,800 + closing debtors) ÷ 2 / $266,400
2 ÷ 12 x $266,400 = ($39,800 + closing debtors) ÷ 2
2 ÷ 12 x $266,400 x 2 = $39,800 + closing debtors
closing debtors = 2 ÷ 12 x $266,400 x 2 – $39,800 = $49,000
(b)
Craze Club
Income and expenditure account for the year ended 31 December 2009
$ $
Income
Profit from gift shop 100,470
Profit from art course ($164,000 – $40,000 – $8,000) 116,000
Subscriptions (W2) 194,150
410,620
Expenditure
Rent and rates ($2,250 + $120,000 – $3,850) 118,400
Staff salaries 208,740
Depreciation – Furniture and fittings [($84,520 + $30,000) x 20%] 22,904
Subscriptions written off 3,000
Sundry expenses 5,860
Utilities expenses ($17,760 – $960 + $1,020) 17,820
Donations to charities ($20,000 + $2,500) 22,500 399,224
Surplus 11,396
W2
Subscription
$ $
In arrear b/f 4,000 In advance b/f 2,000
Income and Expenditure (balancing figure) 194,150 Bank 188,150
In advance c/f 1,000 Subscription written off 3,000
In arrear c/f 6,000
199,150 199,150
(c)
Craze Club Gif Shop
Balance sheet for the year ended 31 December 2009
$ $ $
Fixed assets
Furniture and fittings ($84,520 + $30,000) 114,520
Less: Accumulated depreciation ($23,760 + $22,904) 46,664
67,856
Current assets
Gift stock 26,730
Gift shop debtors (W3) 49,000
Subscriptions in arrears 6,000
Rent and rates prepaid 3,850
Cash at bank 21,960
107,540
Less Current liabiliities
Subscriptions in advance 1,000
Utilities expenses owing 1,020 2,020 105,520
173,376
Accumulated fund
Balance as at 1 January 2009 161,980
Add: Surplus for the year 11,396
173,376
(a)
Bank reconciliation statement as at 31 December 2008
$ $
Balance as per books 37,020
Add: Direct deposits by members (1) 6,000
Unpresented cheque ($2,930 $223) (3) 2707
Cancelled cheque (3) 223 8,930
45,950
Less: Autopay for utilities (2) 420
Lodgement not yet recorded by bank (4) 4,260 4,680
Balance as per bank statement 41,270
(b)
Fei Fei Dance Club
Bar trading account for the year ended 31 December 2008
$ $
Bar sales (W1) 46,630
Less: Cost of goods sold
Opening stock 3,260
Purchases (W2) 26,384
29,644
Less: Closing stock (balancing figure) 4,547 25,097
Gross profit 21,533
Less: Expenses
Bar operating expenses ($10,610 $2,200 + $2,830) 11,240
Wages and salaries [($54,300 + $7,000 $5,000) x 10%] 5,630 16,870
Net profit on bar trading ($46,630 x 10%) 4,663
W1
Debtors
$ $
Balance b/f 4,780 Bank 46,490
Sales (balancing figure) 46,630 Balance c/f 4,920
51,410 51,410
W2
Creditors
$ $
Bank 27,500 Balance b/f 3,660
Balance c/f 2,544 Purchases (balancing figure) 26,384
30,044 30,044
(c)
Fei Fei Dance Club
Income and expenditure account for the year ended 31 December 2008
$ $
Income
Profit from bar trading 4,663
Profit from annual dance party ($15,000 $9,120 $1,800) 4,080
Subscriptions (W3) 228,190
Interest on loan 3,200
240,133
Expenditure
Loss on disposal of audio equipment ($9,000 $4,260) 4,740
Utilities expenses ($19,860 + $420) 20,280
Rent and rates 125,000
Wages and salaries [($54,300 + $7,000 $5,000) x 90%] 50,670
Donations – charity 2,000
Depreciation expenses – audio equipment [(300,000 – 209,000 – 9,000) x 40% + 28,800 x 40% x 8/12] 40,480 243,170
Deficit (3,037)
W3
Subscription
$ $
In arrear b/f 17,820 In advance b/f 34,950
Income and Expenditure (balancing figure) 228,190 Bank ($217,800 + $6,000*) 223,800
In advance c/f 27,320 In arrear c/f 14,580
273,330 273,330
(d)
Fei Fei Dance Club
Balance sheet as at 31 December 2008
$ $ $
Fixed assets
Audio equipment ($300,000 $50,000 + $28,800) 278,800
Less: Accumulated depreciation ($209,000 $41,000 + $40,480) 208,480
70,320
Current assets
Bar stock 4,547
Bar debtors 4,920
Prepaid wages and salaries 5,000
Loan to Lily Dance Club 40,000
Subscriptions in arrears 14,580
Cash at bank ($37,020 + $6,000 $420 + $223) 42,823
111,870
Less Current liabiliities
Bar creditors ($2,544 + $223) 2,767
Subscriptions in advance 27,320
Bar operating expenses owing 2,830 32,917 78,953
149,273
Accumulated fund
Balance as at 1 January 2008 152,310
Less: Deficit for the year (3,037)
149,273
HKCEE (2009, 7) (Incomplete records)
(a)
Computation of stock value at 31 December 2007
$ $
Stock value as at 13 January 2008 78,178
Add Cost of normal sales ($45,000 x 80%) 36,000
Returns outwards 470 36,470
114,648
Less Purchases ($29,680 – $300) 29,380
Cost of returns inwards ($800 x 80%) 640
Stock written down ($1,000 x 80% – $600) 200
Stock overcast 1,720
Stock received on a sale or return basis 960 32,900
Stock value as at 31 December 2007 81,748
(b)
Debtors control
$ $
Balance b/d ($95,426 + $716) 96,142 Balance b/d 716
Interest income 205 Cash 765,212
Bad debts recovery 150 Returns inwards 2,620
Credit sales (balancing figure) 736,010 Discounts allowed 3,150
Allowance on damaged goods 1,000
Bad debts 840
Creditors control – contra 815
Balance c/d 58,154
832,507 832,507
Creditors control
$ $
Cash ($588,458 – $500) 587,958 Balance b/d 64,178
Returns outwards 5,535 Cash – refund 200
Discounts received 2,860 Samples 170
Debtors control – contra 815 Credit purchases (balancing figure) 574,820
Balance c/d 42,200
639,368 639,368
(c)
Albert Shop
Trading account for the year ended 31 December 2008
$ $
Sales ($736,010 + $5,510) 741,520
Less: Returns inwards 2,620
Net sales 738,900
Less: Cost of goods sold
Opening stock 81,748
Add: Purchases ($574,820 + $1,029) 575,849
Carriage inwards 230
657,827
Less: Returns outwards 5,535
652,292
Less: Drawings ($1,080 x 80%) 864
651,428
Less: Closing stock (balancing figure) 60,308 591,120
Gross profit ($738,900 x 20%) 147,780
HKCEE (2008, 3) (Accounting Principles and incomplete)
(B)
Statement to calculate the closing stock value of Mr Wong’s business as at 31 December 2007
$ $
Closing stock value as at 6 January 2008 38,420
Add: (ii) Net sales after year end [($6,880 $5,900) / (1 + 25%)] 784
(iii) Drawings after year end 350
(iii) Discounted sales to staff [($2,000 x 2 / (1 + 25%)] 3,200
(iv) Goods held by customer for inspection 720 5,054
43,474
Less: (i) Damaged goods 100
(ii) Purchased after year end 7,230 7,330
Closing stock value as at 31 December 2007 36,144
HKCEE (2007, 5) (Incomplete record)
(a)
Bank
$ $
Balance b/d 107,750 Trade creditors 1,839,000
Trade debtors (W1) 2,345,000 Selling expenses 182,240
Administrative expenses 109,120
Drawings 18,000
Balance c/d 304,390
2,452,750 2,452,750
W1
Trade debtors
$ $
Balance b/d 157,500 Bank (balancing figure) 2,345,000
Sales (560,000 + 530,000 + 620,000 + 680,000) 2,390,000 Discounts allowed 21,060
Balance c/d 181,440
2,547,500 2,547,500
(b)
George Ho
Trading and profit and loss account for the year ended 31 March 2007
$ $
Sales 2,390,000
Opening stock 284,000
Add: Purchases (W2) 1,848,000
2,132,000
Less: Drawings 20,000
Stock stolen (balancing figure) 412,000
1,700,000
Less: Closing stock 212,000
Cost of goods sold [($284,000 + $212,000) ÷ 2 ÷ 2 x 12] 1,488,000
Gross profit 902,000
Discounts received 16,000
918,000
Less: Selling expenses ($182,240 $5,750 + $7,020) 183,510
Administrative expenses ($109,120 + $3,000 $3,360) 108,760
Discounts allowed 21,060
Depreciation – motor vehicles [$420,000 x 10% + $180,000 x 10% x 1/12] 43,500
Stock stolen 412,000 768,830
Net profit 149,170
W2
Trade creditors
$ $
Discounts received 16,000 Balance b/d 105,000
Bank 1,839,000 Purchases (balancing figure) 1,848,000
Balance c/d 98,000
1,953,000 1,953,000
(c)
George Ho
Balance sheet as at 31 March 2007
$ $ $
Fixed Assets
Motor vehicles ($420,000 + $180,000) 600,000
Less: Accumulated depreciation ($252,000 + $43,500) 295,500 304,500
Current assets
Stock 212,000
Trade debtors 181,440
Prepaid administrative expenses 3,360
Bank 304,390
701,190
Less Current Liabilities
Trade creditors 98,000
Other creditors 180,000
Accrued selling expenses 7,020 285,020
Working capital 416,170
720,670
W3
Statement to show the calculation of capital as at 1 April 2006
$ $
Motor vehicles, at cost 420,000
Stock, at cost 284,000
Trade debtors 157,500
Prepaid administrative expenses 3,000
Bank 107,750
972,250
Less: Accumulated depreciation 252,000
Trade creditors 105,000
Accrued selling expenses 5,750 362,750
609,500
HKCEE (2006, 7) (Incomplete records)
(a)
Bar trading for the year ended 31 March 2006
$ $
Bar sales ($16,000 ÷ 10%) 160,000
Less: Cost of sales
Opening stock 18,580
Bar purchases (balancing figure) 63,640
82,220
Less: Closing stock ($72,000 ÷ 5 x 2 – $18,580) 10,220
72,000
Gross profit ($160,000 x 55%) 88,000
Less: Bar operating expenses 19,450
Rent and rates [($174,000 + $2,500 – $6,500) x 10%] 17,000 36,450
Bar profit 51,550
(b)
Summit Badminton Club
Income and expenditure account for the year ended 31 March 2006
$ $
Income
Subscriptions ($254,200 + $11,000 + $10,800 – $9,300 – $7,800) 258,900
Profit from bar 51,550
Profit from badminton course ($125,000 – $95,000) 30,000
Profit from sale of rackets 20,500
360,950
Expenditure
Loss on disposal of office equipment ($8,000 – $6,500) 1,500
Electricity ($21,500 + $3,000 – $5,000) 19,500
Salaries 143,000
Rent and rates [($174,000 + $2,500 – $6,500) x 90%] 153,000
Depreciation – Office equipment [($260,000 – $90,000) – ($135,000 – $82,000)] x 25%
+ ($100,000 x 25% x 3/12) 35,500 352,500
Surplus of income over expenditure 8,450
(c)
Summit Badminton Club
Balance sheet as at 31 March 2006
$ $ $
Fixed assets
Office equipment ($260,000$90,000 + $100,000) 270,000
Less: Provision for depreciation ($135,000$82,000 + $35,500) 88,500
181,500
Current assets
Bar stock 10,220
Stock of rackets ($48,900$20,500$30,600) 2,200
Bad debtors (W1) 15,500
Prepayments 6,500
Subscriptions in arrears 10,800
Bank 21,770
66,990
Less Current liabiliities
Bar creditors (W2) 15,240
Electricity owing 3,000
Subscription in advance 7,800 26,040 40,950
222,450
Accumulated fund
Balance as at 1 April 2005 (W3) 214,000
Add: Surplus for the year 8,450
222,450
W1
Bar debtors
$ $
Balances b/d 13,200 Receipts and payments 141,700
Credit sales ($160,000 x 90%) from (ii) 144,000 Balance c/d 15,500
157,200 157,200
W2
Bar creditors
$ $
Receipts and payments 52,700 Balance b/d 4,300
Balance c/d 15,240 Purchases (from (a)) 63,640
67,940 67,940
W3
Calculation of accumulated fund as 1 April 2005
$ $
Office equipment 260,000
Less: Provision for depreciation 135,000 125,000
Bar stock 18,580
Subscriptions in arrears 9,300
Bar debtors 13,200
Rent and rates prepaid 2,500
Bank 65,720
234,300
Less: Subscriptions in advance: 11,000
Bar creditors 4,300
Electricity owing 5,000 20,300
214,000
HKCEE (2005, 7) (Incomplete records)
(a)
Cash
$ $
Balances b/f 5,120 Rent and rates ($91,200 + $1,800) 93,000
Cash sales ($21,975 x 12) 263,700 Selling and distribution expenses ($10,990 – $490) 10,500
Sale proceeds of office equipment 30,000 Administrative expenses ($219,700 – $13,000) 206,700
Debtors (W2) 545,738 Cash purchases ($10,000 x 12) 120,000
Drawings 20,000
Cash banked (W1) 389,620
Cash loss (balancing figure) 4,700
Balances c/f 38
844,558 844,558
Workings:
W1
Bank
$ $
Balances b/f 60,380 Trade creditors 381,000
Cash banked (balancing figure) 389,620 Purchase of office equipment 28,000
Balances c/f 41,000
450,000 450,000
W2
Debtors
$ $
Balances b/f 54,000 Bad debts 8,720
Credit sales (W3) 622,800 Discounts allowed 20,642
Cash (balancing figure) 545,738
Balances c/f 101,700
676,800 676,800
W3
Calculate credit sales:
Credit period = (Average debtors / Net credit sales) x 12
1.5 = [($54,000 + 101,700) ÷ 2 / Net credit sales] x 12
Net credit sales = [($54,000 + $101,700) ÷ 2 x 12 ÷ 1.5
Net credit sales = $622,800
(b)
Calculation of amount of stock loss on 31 March 2005
$
Stock figure before adjustment 30,800
Add Purchases (W4) 505,000
535,800
Less Cost of goods sold (W5) 492,500
43,300
Less Closing stock 16,300
Stock loss 27,000
W4
Creditors
$ $
Bank 381,000 Balances b/f 27,000
Balances c/f 31,000 Credit purchases (balancing figure) 385,000
412,000 412,000
W5
Cost of goods sold x (1 + 80%) = Sales
Cost of goods sold x (1 + 80%) = Credit sales + Cash sales
Cost of goods sold x 180% = $622,800 + $263,700
Cost of goods sold x 180% = $886,500
Cost of goods sold = $492,500
HKALE (2006, Paper 1, 2) (Incomplete records)
Robert and William
Trading and profit and loss and appropriation account for the year ended 31 December 2005
$ $
Sales (W1) 6,682,500
Less: Returns inwards 210,600
6,471,900
Less: Cost of goods sold:
Purchases (W2) 4,410,000
Less Returns outwards 117,000
Drawings [32,400 ÷ (1 + 80%)] 18,000
4,275,000
Less Closing inventory 679,500 3,595,500
Gross profit 2,876,400
Less Depreciation: Office equipment [(40,000 + 360,000) x 20%] 80,000
Office rent (23,250 x 12) 279,000
Salaries to staff (940,000 + 40,000) 980,000
Miscellaneous expenses (441,260 – 300 – 2,790 ) 438,170
Discounts allowed 3,240 1,780,410
Net profit 1,095,990
Less Partners’ salaries
Robert 150,000
William 180,000 330,000
765,990
Share of profit
Robert (1/2) 382,995
William (1/2) 382,995 765,990
Current assets
Inventories 679,500
Trade debtors 639,900
Rental deposit 23,250
Prepaid electricity expenses 300
1,342,950
Current liabilities
Trade creditors (594,000)
Accrued bonus (40,000)
Bank overdraft (201,250 – 225,000) (23,750) (657,750) 685,200
1,005,200
Robert William
Capital account 110,000 90,000 200,000
Current account
Partner salaries 150,000 180,000
Share of profit 382,995 382,995
Drawings (120,000 + 2,790 + 18,000) (140,790) (150,000)
392,205 412,995 805,200
1,005,200
Cost Accounting
Cost Classification
HKDSE (2014, 3) (Cost Classification)
(b) Product costs are costs that are associated with the manufacture of a particular product. They include
direct materials, direct labour and production overheads.
Product costs are written off to the profit and loss account only when the goods are sold. If the goods
remain unsold at the end of an accounting period, their product costs will be carried forward as
inventories.
Period costs are costs that are not associated with manufacturing but which are necessary for the
operation of a manufacturing business.
Period costs must be written off to the profit and loss account in the period in which they are
incurred.
(b)
Budgeted total amount of contribution $
Sales price per unit 300
Less Total variable cost per unit 168.5
Sales commissions per unit 8
Contribution per unit 123.5
Number of unit sold 4 400
543 400
(c)
Budgeted total amount of net profit $
Total amount of contribution 543 400
Less Fixed production overhead ($1 159 000 $5.5 x 58 000)/12 70 000
Fixed monthly distribution expense 50 000
423 400
(a)
Perry Ltd
Income Statement for the year ended 31 January 2012 using absorption costing
$ $
Sales (220,000 $5.90) 1,298,000
Less: Cost of goods sold:
Direct materials (250,000 × $1.20) 300,000
Direct labour (250,000 × $1.40) 350,000
Variable production overheads (250,000 × $0.70) 175,000
Fixed production overheads absorbed (250,000 × $1.1) 275,000
1,100,000
Less: Closing inventory [(250,000 220,000) x $4.4] 132,000 968,000
Gross profit 330,000
Less: Variable selling and administrative expenses (220,000 x $0.15) 33,000
Fixed selling and administrative expenses 110,000 143,000
Net profit 187,000
(b) Advantages:
— inventory valuations will not be distorted by the changes in current year’s fixed costs
— enables the company to concentrate on its controllable aspects by separating its fixed and
variable costs
— helps management to make production and sales decisions with the calculated marginal costs
information
(a) Cost of raw materials consumed = $40,800 + $170,000 – ($77,000 + $50,000) = $83,800
(a) Direct costs – costs that would be economical to trace their cost object
e.g. purchase cost, cost of stickers, sales commission
Indirect costs – costs that would not be economical to trace their cost object
e.g. printing cost, salaries, rent and rates, insurance, depreciation
(b)
(c) Income statement for the first quarter ended 31 March 20X6
$ $
Sales [($22,500 + $24,000 + 170 x $50) x 200%] 110,000
Opening inventories —
Purchases ($22,500 + $24,000 + $25,000) 71,500
Logo stickers (1,500 x $2) 3,000
Less Closing inventories [(500 – 170) x ($50 + $2)] (17,160) 57,340
Product contribution margin 52,660
Less Variable costs: Commission ($110,000 x 5%) 5,500
Contribution 47,160
Less: Fixed costs
Rent and rates ($5,000 x 3 + $3,600 x 3/12) 15,900
Insurance ($4,500 x 3/12) 1,125
Salaries ($7,000 x 3 + $1,000 x 3) 24,000
Printing costs ($500 x 3) 1,500
Depreciation [$30,000 x 12% x 3/12 + $60,000 x 10% x 3/12] 2,400 44,925
Net profit 2,235
(b) Difference in net profit = $220,000 (under absorption costing) $170,000 (under marginal costing)
= $50,000 (higher under absorption costing)
The difference in net profit arises because the closing inventory is valued differently under the two
approaches. Under absorption costing, a portion of fixed manufacturing costs are absorbed in the
closing inventory. However, under marginal costing, all fixed manufacturing costs are treated as
period costs and written off in the current period. Only variable manufacturing costs are included in
the closing inventory.
Breeze Ltd should accept order option 2 as it can gain an additional profit of $1,400.
Longman (2012, Dec, 4) (Absorption and Marginal Costing)
Pine Ltd
Manufacturing Account for the year ended 30 September 2012
$ $
Opening inventory of raw materials 139,871
Add Purchases 1,397,860
Carriage inwards 56,960 1,454,820
1,594,691
Less Closing inventory of raw materials (140,963)
Cost of raw materials consumed 1,453,728
Manufacturing wages 2,396,990
Royalties 136,951
Prime cost 3,987,669
Factory overheads: Factory supervisors’ salaries 559,870
Factory utilities 237,890
Factory rent and rates 860,955
Depreciation on factory machinery 75,910 1,734,625
5,722,294
Add Opening work-in-progress 320,950
6,043,244
Less Closing work-in-progress (430,590)
Manufacturing cost of goods completed 5,612,654
Pre-Mock Exam 2012-2013 (Absorption and marginal Costing)
4. (a)
Statement showing prime cost, total production cost and total cost
$
Direct materials 55,000
Direct labour (71,500 38,000) 33,500
Royalties 23,500
Prime cost 112,000
Manufacturing overheads 56,000
Total production cost 168,000
Other overheads (90,000 – 55,000) + 38,000 – 56,000 + 16,500) 33,500
Total cost 201,500
(b) (1)
Free Company
Income statement for the month ended 31 January 2011
$ $
Sales ($22 x 4,000) 88,000
Less: Variable cost of goods sold
Direct material cost ($6 x 4,500) 27,000
Direct labour cost ($4 x 4,500) 18,000
Variable production overheads ($3 x 4,500) 13,500
Less: Closing inventory [58,500 / 4,500) x 500] (6,500) 52,000
Product contribution margin 36,000
Less: Variable costs: Sales commission ($2 x 4,000) (8,000)
Contribution 28,000
Less: Fixed production overheads (15,120)
Net profit 12,880
(b) (2)
Free Company
Income statement for the month ended 31 January 2011
$ $
Sales ($22 x 4,000) 88,000
Less: Cost of goods sold
Direct material cost ($6 x 4,500) 27,000
Direct labour cost ($4 x 4,500) 18,000
Variable production overheads ($3 x 4,500) 13,500
Fixed production overheads [(13,500 / 5,400) x 4,500] 11,250
Less: Closing inventory [(69,750 / 4,500) x 500] (7,750) 62,000
Gross profit 26,000
Less: Under-absorption of fixed production overheads (15,120 – 11,250) (3,870)
Sales commission ($2 x 4,000) (8,000)
Net profit 14,130
(HKALE 2007, Paper 2, 2) (Cost classification, Absorption and marginal Costing)
(a)
Absorption Marginal
costing costing
$ $
Direct materials 40 40
Direct labour (3 $15) 45 45
Variable factory overheads 11.8 11.8
Fixed factory overheads ($1,750,000 350,000) 5 —
Unit production costs 101.8 96.8
(b) (i) Manufacturing cost of goods completed under absorption costing = 350,000 101.8 = $35,630,000
Manufacturing cost of goods completed under marginal costing = 350,000 96.8 = $33,880,000
(ii) Cost of goods sold under absorption costing = 395,000 101.8 = $40,211,000
Cost of goods sold under marginal costing = 395,000 96.8 = $38,236,000
(iii)
Absorption Marginal
costing costing
$ $
Opening inventory (W1) 5,599,000 5,324,000
Add Manufacturing cost of goods completed 35,630,000 33,880,000
Cost of goods available for sale 41,229,000 39,204,000
Less Cost of goods sold (40,211,000) (38,236,000)
Closing inventory 1,018,000 968,000
(d) Difference in net profit = Net profit under absorption costing Net profit under marginal costing
= $74,100 $150,900
= $225,000 (profit is lower under absorption costing)
Difference in net profit = Fixed factory overheads included in closing inventory under absorption costing
Fixed factory overheads included in opening inventory under absorption costing
= (10,000 $5) (55,000 $5)
= $225,000
(e) (i) When the sales volume exceeds the production volume, a higher net profit figure will be
reported under marginal costing than under absorption costing.
(ii) When the production volume exceeds the sales volume, a higher net profit figure will be
reported under absorption costing than under marginal costing.
(iii) When the sales volume equals the production volume, the net profit figure reported will be
the same under both marginal costing and absorption costing.
HKET Mock (2011, 8) (Absorption and marginal Costing)
Indirect costs: 80% of the monthly electricity and water expenses for manufacturing use
50% of the monthly rental expenses for manufacturing use
Depreciation for equipment
(b)
Income Statement for the first quarter ended 31 March 20X1 using absorption costing
$ $
Sales ($250,000 + $230,000 + $280,000) 760,000
Less: Cost of goods sold:
Direct materials ($5,800 + $6,700 + $8,200) 20,700
Direct labour (3 × $8,000) 24,000
Manufacturing overhead cost
Electricity and water expenses ($250 x 3 x 80%) 600
Rental expenses for manufacturing ($8,000 × 3 x 0.5) 12,000
Depreciation for equipment [$3,600 ÷ 5) / 4] 180
57,480
Less: Closing inventory [(350 304) x ($57,480 / 350)] 7,555 49,925
Gross profit 710,075
Less: Non-manufacturing overhead cost
Electricity and water expenses ($250 x 3 x 20%) 150
Rental expenses for non-manufacturing ($8,000 × 3 x 0.5) 12,000
Depreciation for computer [$5,000 ÷ 5) / 4] 250
Loan interest [$100,000 x (1 + 4%/12)3 $100,000] 1,003
Management fee ($5,000 / 4) 1,250
Director remuneration fee ($6,000 x 3) 18,000 32,653
Net profit 677,422
Income Statement for the first quarter ended 31 March 20X1 using marginal costing
$ $ $
Sales ($250,000 + $230,000 + $280,000) 760,000
Less: Variable cost of goods sold:
Direct materials ($5,800 + $6,700 + $8,200) 20,700
Direct labour (3 × $8,000) 24,000
44,700
Less: Closing inventory [(350 304) x ($44,700 / 350)] 5,875 38,825
Contribution 721,175
Less: Fixed manufacturing cost
Electricity and water expenses ($250 x 3 x 80%) 600
Rental expenses for manufacturing ($8,000 × 3 x 0.5) 12,000
Depreciation for equipment [$3,600 ÷ 5) / 4] 180 12,780
Fixed non-manufacturing cost
Electricity and water expenses ($250 x 3 x 20%) 150
Rental expenses for non-manufacturing ($8,000 × 3 x 0.5) 12,000
Depreciation for computer [$5,000 ÷ 5) / 4] 250
Loan interest [$100,000 x (1 + 4%/12)3 $100,000] 1,003
Management fee ($5,000 / 4) 1,250
Director remuneration fee ($6,000 x 3) 18,000 32,653 45,433
Net profit 675,742
(c) Fixed costs are sunk costs. They should not be considered when managers are going to make decisions.
(d) Mr. Chan could choose either marginal costing or absorption costing.
However, marginal costing is not acceptable if Mr. Chan is going to publish the financial statement to
the public.
(a)
i-M Limited
Schedule of Cost of Goods Manufactured
$ $
Opening inventory of raw materials 24,000
Add: Purchases of raw materials 53,000
Total raw materials available 77,000
Less: Closing inventory of raw materials 6,000
71,000
Less Indirect materials included in actual manufacturing overhead 8,000 63,000
Direct labour 62,000
Prime cost 125,000
Manufacturing overhead absorbed ($360,000/30,000 x $62,000/25) 29,760
154,760
Add: Work in process inventory, beginning 41,000
195,760
Less: Work in process inventory, ending 38,000
Manufacturing cost of goods completed 157,760
(b)
i-M Limited
Schedule of Cost of Goods Sold
$
Finished goods inventory, beginning 86,000
Add: Manufacturing cost of goods completed 157,760
Goods available for sale 243,760
Less: Finished goods inventory, ending 93,000
150,760
Add: Under-absorbed manufacturing overhead [($32,000$8,000)$29,760] 10,240
Cost of goods sold 161,000
(c) — The job cost sheet is used to record all costs that are assigned to a particular job. These costs
include direct materials and direct labour costs traced to the job and manufacturing overhead
cost applied to the job.
— When a job is completed, the job cost sheet is used to compute the unit product cost.
— The job cost sheet is also a control document for determining (1) how many units have been
sold and the cost of these units and (2) how many units are still in inventory at the end of a
period and the cost of these units on the statement of financial position.
Variable production overhead per unit = ($518,000 $380,000) / (80,000 – 50,000) = $4.6
(b)
— Including both fixed and variable manufacturing costs in inventory valuation can better reflect the costs
incurred to produce goods.
— Distinguishing between manufacturing and non- manufacturing costs is easier than distinguishing
between fixed and variable costs.
(c) (i) Irrelevant cost: The $240,000 research and development is sunk cost and should be ignored for
decision making.
(ii) Relevant cost: The additional expenses will be incurred when Product Y is produced.
(iii) Irrelevant cost: The engineer’s salary of $150,000 is irrelevant to the decision as it does not
represent incremental cost to the company.
As product Y will generate an additional profit of $200,000, the company should produce and sell
product Y even it has a product life of one year only.
Cost-volume-profit analysis
HKDSE (2014, 4) (Cost-Volume-profit analysis)
(a) Unit contribution margin of DVD = $150 $30 = $120
Unit contribution margin of Dancer Kit = $600 $125 = $475
Let x be the breakeven sales quantity of dancer kit, 5x be the breakeven sales quantity of DVD
x($475) + 5x($120) = $860,000
475x + 600x = 860,000
1075x = 860,000
x = 800
The breakeven sale quantity of dancer kit is 800 unit.
The breakeven sale quantity of DVD = 800 x 5 = 4,000 unit.
(b) (i) Contribution margin = $960,000 – ($120,000 + $150,000 + $66,000 + $960,000 x 5%) = $576,000
Contribution margin ratio = $576,000 / $960,000 = 60%
(ii) Let the breakeven sales be x, we have
x (60%) = fixed costs
0.6x = $247,000
x = $411,667
Sales commission is a variable cost and it will decrease the contribution margin ratio. As the fixed
costs remain unchanged, the breakeven sales will increase by $31,667 ($411,667 $380,000)
The net profit of offering the sales commission is greater than the original by $12,000 ($389,000
$377,000). Eva company should offer the sales commission.
(c) Reasons:
— sales are moving closer to the breakeven point
— profit is going down and the possibility of less is greater
(a) (1) Total fixed costs = 1,000,000 x 80% + 900,000 x 2/3 + 528,500
= 1,928,500
(2) Total variable costs = 480,000 + 320,000 + 1,000,000 x 20% + 900,000 x 1/3
= $1,300,000
(b)
Alternative A
Per unit
$
Selling price 49.5
Less Variable costs:
Original variable costs ($1,300,000 / 80,000) 16.25
Sales commission (49.5 x 10%) 4.95
Contribution per unit 28.3
Alternative B
Existing contribution:
Per unit
$
Selling price 49.5
Less Original variable costs ($1,300,000 / 80,000) 16.25
Contribution per unit 33.25
Mail-order contribution
Per unit
$
Selling price 37.5
Less Original variable costs without sales commission ($1,000,000 / 80,000) 12.5
Contribution per unit 25
Total fixed cost = 1,928,500 + 25,000 x 12 = 2,228,500
Total existing contribution = 33.25 x 48,000 = 1,596,000
Required fixed cost for mail-order house = 2,228,500 1,596,000 = 632,500
Additional units for mail-order house to breakeven = 632,500 / 25 = 25,300
Breakeven point (in units) = 48,000 + 25,300 = 73,300 units
(c)
Alternative A
Per unit
$
Contribution (28.3 x 76,000) 2,150,800
Total fixed cost 1,981,000
Net profit 169,800
Alternative B
Per unit
$
Contribution [33.25 x 48,000 + 25 x (80,000 48,000)] 2,396,000
Total fixed cost 2,228,500
Net profit 167,500
(e)
Not Hire Hire
$ $
Rental cost 125,000
Direct labour cost ($4 x 76,000) 304,000 182,400
Tot relevant cost for hire 304,000 307,400
(a) (1) The breakeven volume (in units) = (280 000 + 158 840) / $13.8 (W1)
= 31 800 units
(2) the margin of safety (in sales dollars) = $2 400 000 – 31 800 x $30
= $1 446 000
(W1)
Total Per unit
$ $
Sales 2 400 000 30
Less Variable costs:
Direct materials 784 000 9.8
Direct labour 280 000 3.5
Designer fees 120 000 1.5
Sales commission 112 000 1.4
Contribution per unit 13.8
Sunk cost:
— This is the cost that has already been spent on the acquisition of the resource, and is not affected
by any subsequent events.
— Example: the cost paid for the consultancy fees, i.e. $120 000, has already been incurred and that
cost will not be changed by any decision made in the future.
As the proposed scenario leads to an increase in monthly profit of $12 500, it should be considered.
(W2)
$
Variable production cost 15
Sales commission 5
Total variable cost per unit 20
(W4)
$
Fixed production overheads 280 000
Fixed administrative overheads 158 840
Factory rent 100 000
Depreciation of machine [($893 960 – $5000)/4 x 12] 18 520
Total fixed costs 557 360
(b)
(c) Income statement for the first quarter ended 31 March 20X6
$ $
Sales [($22,500 + $24,000 + 170 x $50) x 200%] 110,000
Opening inventories —
Purchases ($22,500 + $24,000 + $25,000) 71,500
Logo stickers (1,500 x $2) 3,000
Less Closing inventories [(500 – 170) x ($50 + $2)] (17,160) 57,340
Product contribution margin 52,660
Less Variable costs: Commission ($110,000 x 5%) 5,500
Contribution 47,160
Less: Fixed costs
Rent and rates ($5,000 x 3 + $3,600 x 3/12) 15,900
Insurance ($4,500 x 3/12) 1,125
Salaries ($7,000 x 3 + $1,000 x 3) 24,000
Printing costs ($500 x 3) 1,500
Depreciation [$30,000 x 12% x 3/12 + $60,000 x 10% x 3/12] 2,400 44,925
Net profit 2,235
(ii) Contribution margin ratio = Unit contribution margin ÷ Unit selling price
= $50 ÷ $150
= 33.33%
(ii) Margin of safety ratio = ($1,350,000 4,000 x $150) / $1,350,000
= 55.56%
(b) Unit contribution margin = $150 $60 x 106% $25 x 105% $20.15 = $40
Break-even sales in units = ($200,000 + $40,000) ÷ $40 = 6,000 units
Margin of safety ratio = (Required sales volume – 6,000) / Required sales volume
55.6% = (Required sales volume – 6,000) / Required sales volume
0.556 x Required sales volume = Required sales volume – 6,000
Required sales volume = 13,514 units
(b)
Break-even sales volume of Product M = 110,000 x 40,000 / 140,000 = 31,429 units
Break-even sales volume of Product N = 110,000 x 100,000 / 140,000 = 78,571 units
Break-even sales revenue of Product M = 31,429 $350 = $11,000,150
Break-even sales revenue of Product N = 78,571 $220 = $17,285,620
(c)
Weighted average unit selling price = [$350 (40,000 140,000)] + [$220 (100,000 140,000)]
= $257.14
Contribution margin ratio = $90 $257.14 = 35%
3.
(a) Prime cost is the total of all direct manufacturing costs.
Direct materials and direct labour wages are the examples of direct costs.
Chair Desk
$ $
Sales 300 150
Less: Variable costs 190 85
Contribution 110 65
(a) Contribution margin per unit = $ 770,000 / 4,000 = $192.5 per pair
Break-even point (calculate the units sold) = Fixed cost / Contribution margin per unit
= $370,000 / $192.5
= 1922.08
= 1,923 pairs
(c) Month’s sales in accounts receivable = (Average account receivable / Net credit sales) x 12
= {$450,000 / [1,230,000 x (1 – 20%)} x 12
= 5.49 months
(d) Let y be the unit price for each pair of sports shoes
4,000 y = Fixed cost + target net profit + variable cost
4,000 y = 370,000 + 400,000 (1+30%) + 460,000
4,000 y = 370,000 + 520,000 + 460,000
y = $ 337.5
Rocket Limited needs to reset the selling price to $ 337.5 for each pair of sports shoes so as to
achieve the target net profit.
(a)
$
Selling price per bottle 6.00
Less: Variable production cost of pasteurized milk [($600,000 + $120,000)/ 200,000] 3.60
Bottling cost 1.50
Contribution per bottle of milk 0.90
(b)
Bottled milk Yogurt
(3 litres) (2 litres)
Selling price 18.00 20.00
Less: Variable production cost of pasteurized milk (3 x $3.50) 10.50 10.50
Further processing cost (2 x $2) – 4.00
Bottling cost / packing cost 4.50 2.00
Contribution 3.00 3.50
As yogurt generates a higher amount of contribution than bottled milk, its production and sales is recommended.
(a)
Product X Product Y
$ $
Selling price 800 400
Less: Variable costs
Sales incentive (5%) 800 x 5% 40 400 x 5% 20
Cost of goods sold 250 90
Royalties ¾ 40
Cost of after-sales service 70 ¾
Contribution per unit 440 250
Alternative A
$ $
Contribution (700 x $440) 308,000
Less: Fixed costs
Salesmen’s salaries (3 x $20,000) 60,000
Rental cost 150,000 210,000
Total profit 98,000
Alternative B
$ $
Contribution (900 x $440) 396,000
Less: Fixed costs
Advertising 100,000
Salesmen’s salaries (3 x $20,000) 60,000
Rental cost 150,000 310,000
Total profit 86,000
Alternative C
$ $
Contribution of Product X (600 x $440) 264,000
Contribution of Product Y (300 x $250) 75,000
339,000
Less: Fixed costs
Salesmen’s salaries (3 x $20,000) 60,000
Rental cost ($150,000 + $16,000) 166,000 226,000
Total profit 113,000
(a) (i)
$
Contribution of Product D ($1,000$600) x 1,000 units 400,000
Contribution of Product S ($150$50) x 4,000 units 400,000
800,000
$
Sales revenue of Product D ($1,000 x 1,000 units) 1,000,000
Sales revenue of Product S ($150 x 4,000 units) 600,000
1,600,000
Contribution margin ratio = contribution margin / Sales = $800,000 / $1,600,000 = 50%
Break-even sales = Fixed costs ÷ Contribution margin ratio = $550,000 50% = $1,100,000
(ii)
Margin of safety is the amount of sales that can be reduced before a loss occurs. It is the difference
between the sales revenue less the sales revenue at break-even point.
Margin of safety = $1,600,000 $1,100,000 = $500,000
(c)
$
Original fixed cost 550,000
Promotion expenses 166,000
Expected profit ($800,000$550,000) 250,000
Total fixed cost + Target profit 966,000
(d)
Alternative 1 Alternative 2
Machine hours of Product D (60 hours x 500 units) 30,000
Machine hours of Product S 100,000 70,000
100,000 100,000
(b)
Helen Ltd
Budgeted income statement for the year ended 31 December 2014
$ $
Sales ($6,000,000 x 80% x 110%) 5,280,000
Cost of goods sold (5,280,000 x 52%) (2,745,600)
Gross profit (5,280,000 x 48%) 2,534,400
Selling expenses – fixed rental expenses ($270,000 x 2/3 + $15,000) (195,000)
– sales commission ($5,280,000 x 10.5%) (554,400) (749,400)
Administrative expenses – salaries ($560,000 $10,000 x 12 + $20,000) (460,000)
– office expenses (350,000 x 4/7 + 150,000 x 4/5) (320,000) (780,000)
Net profit 1,005,000
(c) As net profit will be increased by $115,000 ($1,005,000 - $890,000), Helen Ltd should close Shop C.
— The normal selling price is built on historical cost concept and has little relevant in making decision.
— The relevant costing approach looks to the future such that the offer of $15 per frame should be
accepted as it is higher than the cost of $8.3, at which the firm will make neither a loss nor a gain.
(d) — Other customers may request the lower price charged and the current buyers may ask for the same
special offer in future.
— The firm should be sure they can meet the rush order with premium quality, or the
reputation of the firm will be impaired.
— The competitive state of the market should be considered. The firm may not be able to
afford to lose potential customers.
— There may be limiting factors which will affect the completion of the order.
— Legal/social implications in relation to the banned materials should be considered.
HKDSE (sample, 9) (Cost Accounting)
(a) Direct costs – costs that would be economical to trace their cost object
e.g. purchase cost, cost of stickers, sales commission
Indirect costs – costs that would not be economical to trace their cost object
e.g. printing cost, salaries, rent and rates, insurance, depreciation
(b)
Marginal costing Absorption costing
Inventory — Only variable costs are charged to units. — Fixed costs are treated as product costs
valuation and can be carried forward to the next
period in the value of each unit.
Income — Fixed costs incurred will not be carried — A proportion of the fixed costs of the
determination forward and the profit of the current current period will be carried forward to
the next accounting period and therefore
accounting period will be lower. the profit of the current accounting
period will be higher.
(c) Income statement for the first quarter ended 31 March 20X6
$ $
Sales [($22,500 + $24,000 + 170 x $50) x 200%] 110,000
Opening inventories —
Purchases ($22,500 + $24,000 + $25,000) 71,500
Logo stickers (1,500 x $2) 3,000
Less Closing inventories [(500 – 170) x ($50 + $2)] (17,160) 57,340
Product contribution margin 52,660
Less Variable costs: Commission ($110,000 x 5%) 5,500
Contribution 47,160
Less: Fixed costs
Rent and rates ($5,000 x 3 + $3,600 x 3/12) 15,900
Insurance ($4,500 x 3/12) 1,125
Salaries ($7,000 x 3 + $1,000 x 3) 24,000
Printing costs ($500 x 3) 1,500
Depreciation [$30,000 x 12% x 3/12 + $60,000 x 10% x 3/12] 2,400 44,925
Net profit 2,235
(e) — a platform for self-actualization: the business provides an outlet for Mary to introduce products of
her own design
— a form of investment: the rate of return on her business has reached 8%, which is higher than the
market interest rate
— a opportunity for self-development: Mary will acquire management skills by developing her
business strategies and job design in real situations
Longman (2012, Dec, 8) (Decision-making)
(a) The old machine’s net book value:
The old machine’s net book value is irrelevant as it is the sunk cost and had paid it already. It is not
the machine’s disposal value, which is relevant to decision-making.
The machine’s annual fixed operating costs:
The machine’s annual fixed operating costs are irrelevant as the company will incur the same
amount of fixed operating costs whether it uses the old machine or a new one.
(b)
Old machine New machine
Purchase cost of the new machine — $2,000,000
Machine operator’s annual salary $150,000 $180,000
Annual variable operating costs $600,000 $400,000
Current disposal value — ($400,000)
Residual value at the end of useful life ($80,000) ($150,000)
Total relevant costs 670,000 2,030,000
The company should retain the old machine as the new machine will cost more than the old one.
(c)
Statement showing the relevant cost and revenues for the special order
$
Sales ($22 x 150,000) 3,300,000
Less Cost of sales: Variable [($14 $1) x 150,000] (1,950,000)
Operating expenses: Variable ($3.2 x 150,000) (480,000)
Production machinery modification cost (100,000)
Net profit 770,000
Variable cost per unit = ($1,375,000 $55,000) / 55,000 = $24 per unit
Alternative 2:
$ $
Sales [$40 x 0.9 x (55,000 + 30,000)] 3,060,000
Less: Variable costs [($24 $4 $2) x (55,000 + 30,000)] 1,530,000
Contribution 1,530,000
Less: Fixed production overheads 55,000
Depreciation of machine ($50,000 / 4) 12,500 67,500
Net profit 1,462,500
The management should adopt alternative 2 as its net profit is greater than that of alternative 1.
(b)
Make Buy
$ $
Direct materials ($5 x 5 x 40,000) 1,000,000 —
Direct labour [($5 + $10) x 40,000] 600,000 —
Variable overheads [($24 $3 x 5 $5) x 40,000] 160,000 —
Fixed overheads 55,000 55,000
Rental revenue forgone — (450,000)
Disposal value of a machine forgone — (6,000)
Purchase costs (40,000 $45) — 1,800,000
Total costs 1,815,000 1,399,000
Since the purchase price is lower than the relevant cost of production, the company should buy
product X instead of producing it.
(c) Factors:
— The quality of product X purchased from the supplier
— The possibility of any increase in price of product X in the future
— The cease of production could lead to redundancy payments which may be greater than the
cost saved.
Pre-Mock Exam 2012-2013 (Cost accounting for decision-making)
7. (a)
(i) The total monthly variable production costs = 268,450 + 61,650 + 586,300 + 47,200 = 963,600
(iv) Variable production costs per litre of finished goods = (963,600 39,600) / 3,080 = $300
(v) break-even volume (in litres) = (712,800 + 208,800) / (700 – 300) = 2,304.0 litres
(b) Proposal 1
The total monthly variable production costs
= 268,450 x (1 – 20%) + 23,656 + 586,300 x (1 + 8%) + 47,200 (1 – 10%)
= 914,100
Selling amount of scrap = 3,740 x 1/34 x 60 = $6,600
Variable production costs per litre of finished goods = (914,100 6,600) / (3,740 x 33/34) = $250
Break-even volume (in litres) = (712,800 + 208,800) / (700 – 250) = 2,048.0 litres
Proposal 2
The total monthly variable production costs
= 268,450 x (1 – 30%) + 61,650 + 586,300 x (1 – 18%) + (47,200 – 11,051)
= 766,480
Selling amount of scrap = 3,740 x 1/17 x 60 = $13,200
Variable production costs per litre of finished goods = (766,480 13,200) / (3,740 x 16/17) = $214
Monthly Depreciation = (4,000,000 – 86,080) / 3 / 12= 108,720
Break-even volume (in litres) = (712,800 + 208,800 + 108,720) / (700 – 214) = 2,120.0 litres
(c)
Statement showing the budgeted monthly profit in (a) and the estimated
monthly profits in Proposal 1 and 2
Budgeted Proposal 1 Proposal 2
$ $ $
Contribution 1,600,000 1,800,000 1,944,000
Fixed costs (921,600) (921,600) (1,030,320)
Estimated monthly profit 678,400 878,400 913,680
(e)
Statement showing all the relevant costs and revenue to find the profit or loss on the order
$
Total revenue 2,100,000
Less: Materials C cost 500,000
Materials D cost ($120,000 + $350,000 x 2) 820,000
Direct wages 385,000
Variable production overheads [$385,000 x 120% $385,000 x 40%] 308,000
Profit 87,000