Professional Documents
Culture Documents
Accounting
VIJAY SOOKHAREE
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TEST 1
PAPER 2 Time 1 hour 30 minutes
QUESTION 1
(a) Dennis who began trading on 1 January 1999, identified the following stock in his stock-room on
31 December 1999.
Calculate the total value of the stock for preparation of the accounts to 31 December 1999.
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(b) ‘Hi-Tech Ltd reduces its selling price by 20% and increases its sales volume by 20% as a
consequence of the price reduction’. The trainee accountant assumes that the profit will not
change.
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QUESTION 2
(a) The following table relates to the depreciation of some of the fixed assets of Bobby Ltd.
Date Bought 1 Jan 1990 1 Jan 1990 1 Jan 1990 1 Jan 1990
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(b) Explain why fixed assets depreciated.
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QUESTION 3
Arnold, a sole trader, commenced trading on 1 January 1998. He has provided you with the
following details of his telephone costs.
He is to prepare his first accounts to 31 October 1998 and estimates that the total cost of his calls
for October 1998 will be $74.
Prepare Arnold’s ledger accounts for the telephone for the period from 1 January 1998 to 31
October 1998.
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QUESTION 4
(a) Aman will become a junior partner in the existing partnerships of Bony and Dony as from 1
January 1999, on the following terms:
(i) Goodwill will be valued at six years purchase of the weighted average net
profits/losses of the five years to 31 December 1998, the weightings will be 1, 2, 3, 4
and 5 for years 1994, 1995, 1996, 1997 and 1998 respectively. The profis/losses for
this period were:
Year Profits/Losses
1994 ( 32 000)
1995 6 000
1996 15 000
1997 20 000
1998 9 000
(ii) Aman will invest $20 000 in the partnership, 40% as capital and 60% as his share of
the Goodwill.
(iii) Aman’s share of the profits/losses of the firm will be based upon his share of the
Goodwill; Bony and Dony continue to share profits/losses between themselves in
the ratio 60% : 40% respectively.
REQUIRED
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(ii) Calculate the proposed profit/loss sharing ratio of Bony, Dony and Aman.
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(b) The summarized Balance Sheet of Bony and Dony at 31 December 1998 was as follows:
$000 $000
Capital
Bony 180 Goodwill 10
Dony 60 Fixed Assets 100
Current Liabilities 20 Current Assets
150 260
260
Subsequently, on 1 January 1999, the three partners agree to exclude goodwill from their
Balance Sheet and to make the following revaluations in their Balance Sheet Value.
(i) Stock at $5 000 LESS than its present Balance Sheet Value
(ii) Fixed assets at $30 000 MORE than their present Balance Sheet Value.
REQUIRED
Prepare a Balance Sheet at 1 January 1999 for Bony, Dony and Aman, assuming that no transactions
other than those outlined above had taken place.
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QUESTION 5
As the new accountant of Expanding Company you have only had time to produce accounts for
each of two months which contain the following figures:
February March
$ $
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(iii) The level of sales required to give a profit of $50 000 per month.
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(iv) The level of profit which would be made on monthly sales of $250 000.
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(b) Prepare a single profit/volume graph to show the relevant information from the above
figures, for the two months.
(c) Calculate a profit/volume ratio (contribution to sales) from the above information.
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(d) On your graph show the break-even point, the margin of safety and the fixed cost figure. [3]
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TEST 2
PAPER 2 Time: 1 Hour 30 minutes
QUESTION 1
Alex runs a compact disc shop. All purchase are made on credit. Sales are a mixture of cash and
credit. For the year ended 31 December 1998, the opening and closing creditors, debtors were as
follows:
A summary of the bank account for the year ended 31 December 1998 is as follows:
$ $
Balance b/f 12 500 Supplies for purchases 114 000
Cash and Cheques banked 121 000 Rent and rates 10
000 Other expenses 4
000 Balance c/d 5
500
Alex made the following payments out of the till during the year:
$
Petrol 400
Stationery 200
He also drew money out of the till for his personal use, but he has not kept a record of the amounts
drawn.
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Calculate the Sales and Drawings for the year ended 31 December 1998
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QUESTION 2
The following relate to a Sales Ledger for the year ended 30 April 1999:
$
Balance on Sales Ledger Control, 1 May 1998 19 340
Sales 188 216
Receipts from customers 150 750
Discounts allowed 4
800
The total of balances contained within the Sales Ledger at 30 April 1999 was:
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Investigations revealed the following:
(1) Bad debts written off during the year totaled $2500. Although the correct entries had been
made in the relevant personal accounts, no entry had been made in the Control Account.
(2) A cheque received from P. Tony for $240 had been posted mistakenly to the Credit of Cash
Sales Account in the nominal ledger, instead of Tony’s personal account.
(4) A cheque for $4000 from Brown had been returned by the bank as Brown had insufficient
funds available in his account to meet the cheque. No record had been made of this when
compiling the control account, although Brown’s personal account in the Sales Ledger had
been adjusted.
(5) Goods to the value of $1600 had been returned by a customer, but no record had been made
of this.
(6) A credit balance of $200 had been omitted from the list of balances extracted at the year
end.
(7) The total of Sales shown in the Sales Day Book for November 1998 had been recorded as
$5900 instead of $9500.
REQUIRED
(a) Prepare the Sales Ledger Control Account for the year ended 30 April 1999.
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(b) Prepare a statement showing the reconciliation of the original total sales ledger balances
with the revised control account balance.
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QUESTION 3
During 1995 Alan PLC total sales revenue amounted to $6 000 000 and its cost of goods sold
amounted to $4 000 000.
(C) sold 20 000 Gas and turned over its closing stock 20 times
(2) On 1 January the division purchased Tangible Fixed Assets for $200 000. We expect these
will last for 10 years and then have a disposal value of $30 000.
(A) The office expenses of the division (other than depreciation) amounted to $272 000.
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REQUIRED
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(b) Prepare a Trading Account in Vertical form showing the purchases and closing stock.
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QUESTION 4
The management of Skyline Ltd pays particular attention to the ratios and percentages which they
calculate from their annual accounts. For the year ended 31 December 1998 they have calculated
the following figures, which they are comparing with those of another company, Dingo Ltd
alongside.
One of the two companies is a manufacturing company, the other is a food retailer, with an
expanding number of shops.
REQUIRED
(a) Which of the two companies is more likely to be the food retailer? Give two reasons for your
choice.
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(b) Assuming that the total sales of Skyline Ltd was $200 000 for the year, the closing cash and
Bank balance were $11 005, sales and purchases accrue evenly over the year, and the
closing stock for the year was $40 000.
Calculate:
(i) The total debtors at 31 December 1998, assuming all sales were on credit terms
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QUESTION 5
Jane manufactures and sells a single product. During the next year she plans to produce 5000 units
and sells all at $8 each. The budgeted income statement is as follows:
$000 $000
Sales 40
less Cost of Sales:
Direct materials 15
Direct wages 10
Fixed production 5
30 Gross profit
10 Fixed Selling and Administration cost
4 Net Profit
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REQUIRED
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(ii) Calculate the contribution per unit.
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(iii) Calculate the number of units required to be produced and sold to ‘break even’.
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(iv) Calculate the expected profit if sales volume were to be increased by 100% as a result of
reducing the selling price by 25%.
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TEST 3
PAPER 2 Time 1 Hour 30 minutes
QUESTION 1
(a) The Appollo Club had 2358 members in year 1991; 25 members owed subscriptions
for the year 1990 at the beginning of year 1991 but they had all paid these arrears
by the end of year 1991; 29 members owed subscriptions for year 1991 at the end
of year 1991; the Appollo club was certain that these arrears would all be paid
eventually. No subscriptions are ever received in advance of the year to which they
relate. The subscriptions rate was 25% higher in year 1991 than in year 1990. In
year 1991, the Appollo club received $117 450 in respect of subscriptions.
Calculate the subscriptions rate for 1991 and then prepare the Appollo Club’s
Subscriptions Account for year 1991.
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(b) In year 1991, the Appollo Club had fixed expenses of $100 000 and variable
expenses of $10 per member.
(i) Prepare the Appollo Club’s Income and Expenditure Account for year 1991.
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(ii) Calculate how many members the Appollo Club needed in year 1991 fro the
Subscription income to equal the total expenses.
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Prepare the Appollo Club’s Income and Expenditure Account for year 1992.
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QUES.TION 2
(a) The following definitions refer to terms which appear in the annual reports of
limited companies:
(i) Consists of stocks, debtors, short term investments, cash at bank and cash in
hand.
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(ii) Consists of Share Capital, distributable and non-distributable reserves.
(iii) The profits for they year due to the Ordinary Shareholders, divided by the
average number of Ordinary Shares in issue during the year.
(iv) The total debtors, short term investments, cash at bank and cash in hand,
divided by the total of liabilities due within one year of the Balance Sheet
date.
State, in no more than three words each, the term to which each of the above definitions
refers.
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(b) The following is the Trial Balance of a limited company at 31 December 1998:
$000 $000
935
935
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The directors propose an ordinary dividend of $0.025 per share for 1998 and a transfer of
$10 000 to general reserves.
Calculate each of the four terms you have defined in (a) (i), (ii), (iii) and (iv) above, to the
nearest decimal place.
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(c) Prepare, in good style, the stamen defined in (a) (v) above.
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QUESTION 3
The following are the book values (cost less accumulated depreciation) of Jim’s fixed assets
at 1 January 1991:
Notes $000
Leasehold factory (1) 175
Freehold shop (2) 149
Machinery (3) 97
Lorry (4) 16
Office equipment (5) 15
452
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(1)This was bought on 1 January 1981 on a 20 year lease for $350 000. It is being
depreciated on a straight line basis.
(2)This was bought on 1 July 1982 and is expected to have a 30 year life with a residual
value of $20 000. It is being depreciated on a straight line basis.
(5)This was bought on 1 January 1991. It will be depreciated using the sum of the digits
basis assuming a five year life and no residual value.
(a) Calculate the depreciation for each of the five assets listed above for the year 1991.
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Machinery ……………………………….
Lorry ……………………………….
(b) Show how each of the above fixed assets should appear in Jim’s Balance Sheet at 31
December 1991.
Separate amounts for Cost and accumulated depreciation for each asset should be
clearly shown.
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QUESTION 4
Jenny, Kitty and Lovena commenced business in partnership on 1 April 1997, having
agreed the followings:
(1)The partners would introduce Capital on 1 April 1997 – Jenny $40 000, Kitty
$40 000 and Lovena $20 000.
(2)In addition, Jenny would make a loan to the partnership on 1 October 1997 of
$20 000 on which interest of 12% per annum would be payable.
(3)Kitty would receive a commission of 15% of the net profit after charging the loan
interest due to Jenny and before charging the commission or crediting interest on
Capital.
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(4)The partners’ salaries would be: Jenny $12 450; Kitty $4 000; Lovena $12 450.
(6)Interest would be charged to partners at 10% of their total drawings for the year.
(7)The balance of profits/losses would be shared: Jenny 50%; Kitty 30%; Lovena 20%.
The net profit of the partnership for the year ended 31 March 1998, before making any
distribution between the partners, was $35 200. Drawings for the year were – Jenny
$14 500; Kitty $12 300; Lovena $8 400.
REQUIRED
(a) Prepare Profit and Loss Appropriation Account for the year ended 31 March 1998.
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(c) Suggest two important reasons why Jenny, Kitty and Lovena might wish to convert
their partnership into a limited Company.
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QUESTION 5
(a) A manufacturer produces two products – A and B. his expected unit sales and
contribution are:
Fixed costs are expected to be $10 000 and assume that product A is sold first, then
product B.
REQUIRED
Plot the two products on a single chart and show the break-even sales.
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TEST 4
PAPER 2 Time: 1 hour 30 minutes
QUESTION 1
Smith started business on 1 January 1997. He now decides to review the depreciation
policy of plant and machinery for the first two years of trading by referring to the financial
years ending 31 December 1997 and 1998.
The profitability situation for the two years shows an increase in profit:
Smith has purchased plant and machinery and his purchases were as follows:
The firm has depreciated plant and machinery at 20% per annum on cost and such rate has
been charged on a monthly basis.
Smith now considers changing the depreciation method from straight line to the reducing
balance. He proposes to charge a full year’s depreciation against the year ends balances
(irrespective of date of purchase) at the rate of 25% per annum.
(a) Calculate the depreciation for each type of machine for 1997 and 1998 using:
1997 1998
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Plant and Machinery Depreciation Depreciation
$ $
1997 1998
(b) Complete the proforma statement to show the net profit which would have been
reported in 1997 and 1998 if the reducing balance method of calculating
depreciation had been used.
1997 1998
$ $
(c) ‘Although depreciation is a non cash expense it is very important in year end
accounts’.
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27
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QUESTION 2
The following are extracts from the Annual Report of the Moonlit Hotels Plc for the year
ended 31 December 1994.
HOTEL TAKINGS
The total takings from letting hotel rooms amounted to $5 500 000.
The takings in the low season were 7/13 the takings in the high
season. In the low season the takings from letting single rooms were
1/3 more than the takings from letting double rooms.
In the high season the takings from letting single rooms
were 50% higher than the takings from letting double rooms.
HOTEL EXPENSES
The general fixed expenses were $2 000 000 for the year.
The general variable expenses were 20% of the total takings from
single rooms and 15% of the total takings from double rooms.
STAFF BONUS
As the takings were the highest in the hotel’s history we paid a special bonus
of 5% of the takings in excess of $5 000 000.
DIRECTORS FEES
In accordance with the contracts, the Directors’ fees will remain at $50 000.
In addition, the Managing Director has been paid commission equal to 1% of the
net profit after charging that commission (rounded up to the nearest $100).
(a) Calculate for Moonlit Hotels Plc for the year ended 31 December 1994:
(i) The takings in the low season and the takings in the high season.
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28
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(iii) The total takings from double rooms.
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29
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(b) Prepare for Moonlit Hotels Plc the Profit and Loss Account for the year ended 31
December 1994.
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QUESTION 3
(a) The following information relates to Marden Plc for the year ended 31 December
1995.
A B C X Y
$ $ $ $
$
REQUIRED
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31
(b) State how for it is true to say the elimination method produces an inaccurate answer
compared with continuous method and is therefore not to be recommended.
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QUESTION 4
Explain, giving reasons, how each proposal should have been treated and explain which
generally accepted accounting conventions and principles should have been applied and
quoting SSAP and FRS.
(a) On 1 July 1998, a business was acquired by Excel Ltd. Goodwill $75 000 arising on
the acquisition was written off immediately in the Profit and Loss Account, on the
grounds that goodwill has an estimated economic life of only four years.
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(b) Stock which cost $15 000 can now be replaced for $11 000. The estimated net
realizable value of this stock is $12 000. It is proposed that the stock should be
written down to $11 000.
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32
(c) Rapid Ltd commenced trading in January 1985. With expansion of business and
trading activities, the company has gained an extremely good name in the trade. As a
result the directors propose to introduce goodwill in the balance sheet as a fixed
asset.
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QUESTION 5
Your company is a member of a scheme using ratio analysis for inter-firm comparison.
From last year’s accounts, the following ratios were calculated.
Profit/Sales 37.2%
Contribution/Sales 55%
Profit/Capital employed 20%
Margin of Safety/Sales 63%
Fixed asset turnover ratio 0.61 times
Current ratio 3:1
Profit/shareholder funds
21% Break-even point/Sales
37%
The budgeted accounts in summary form for next year are as follows:
$000 $000
Sales 320
Variable Cost 120
Fixed Cost 80 200
Profit 120
Balance Sheet
33
$000 $000
Fixed Assets 810
Current Assets 250
Current Liabilities 50 200
REQUIRED
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34
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(b)Compare the ratios you have calculated with those for last year and explain any
changes.
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TEST 5
PAPER 2 Time 1 hour 30 minutes
QUESTION 1
The draft final accounts for the year ended 31 December 1998 of Black included the
following:
$
Net profit 8 100
Debtors 3 500
Suspense account 500 (CR)
The suspense account arises from accounting errors. Investigations revealed the following
information concerning the year ended 31 December 1998.
(1) Discounts allowed of $200 and discounts received of $300 were posted to the Profit
and Loss Account as discounts allowed $300 and discounts received $200.
(3)Stock costing $1200 was stolen from Black’s warehouse in November 1998. No
adjustments have been made in the accounts for the loss of stock or for the agreed
settlement of $950 to be paid by the Insurance Company in January 1999.
35
(4)On 1 July 1998, Office Stationery costing $200 was purchased. This was debited to
the office equipment account. Depreciation is provided on office equipment at the
rate of 10% per annum on cost.
REQIURED
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QUESTION 2
The summarized balance sheet as at 31 October 1998 of King Limited and Robert Limited
are as follows:
36
King Ltd Robert Ltd
$000 $000
Fixed Assets 150
130 Net Current Assets 100
70 250
200
$000
King Ltd 450
Robert Ltd 240
It has been agreed that King Ltd should acquire all the share Capital of Robert Ltd on 1
November 1998 on the basis of the Valuations of the companies on 31 October 1998; the
purchase consideration being newly fully issued paid ordinary shares in King Ltd.
REQUIRED
(a) A computation showing the number of shares in King Ltd to be issued to the
existing shareholders of Robert Ltd.
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QUESTION 3
(a) On the night of 4 April 1995, the warehouse of Alex Ltd was burned down and most
of the stock was destroyed. The stock salvaged was valued at cost in the sum of
$6000. The firm claimed for compensation from its Insurance Company.
$
Stock 11 875
Debtors 8 000
Creditors 5 760
$
Receipts from Debtors 30 500
Cash Sales 8 610
Payments to Creditors 29 815
At 4 April 1995:
Debtors 9 350
Creditors 7 105
38
The firm achieves a margin 1/3 on all sales.
REQUIRED
Using the given information above, calculate the amount of the claim.
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(b) The following Balance Sheet extracts relate to the Machinery owned by Falco PLC
during its first two years of operation.
Year 1 Year 2
$ $
Cost 96 000 96 000
Accumulated depreciation 24 000 42 000
72 000
72 000
Deduce the method of Depreciation used by Falco PLC. Calculations should be shown.
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QUESTION 4
39
Mr and Mrs Kenny have for some years run a small computer manufacturing business. On 1
April 1998 a limited company, Microsoft Ltd, was incorporated to take over the business
from that date. Mr and Mrs Kenny are the only shareholders and directors.
Your firm acts as the company’s accountants and auditors, and Mr Kenny has written to you
with the following queries after receiving the draft accounts which you have prepared for
the year ended 31 March 1999. The company’s turnover for the year was $500 000 and its
profit before tax $50 000.
REQUIRED
Briefly explain the accounting principles involved in the treatment of each of the items
below:
(a) ‘Our factory appears as a fixed asset in the accounts whereas in fact it is on a 50 year
lease, as you state in the notes. Surely it cannot be called an asset if it is not legally
ours’.
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(b) ‘There is no specific disclosure of the bad debt written off of $50 which we discussed
with you. My wife and I feel strongly that this should be separately disclosed,
because the amount is owed by Mr Crook, a prominent local councilor, and there is a
matter of principle here which should be made public’.
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40
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(c) ‘I cannot understand your method of witting off slow moving stock. You have
written off the remaining Pentium 1 Computers which we are unlikely to sell, and I
agree with that. But some of the spares parts for the new Microchipper have not
moved for a year or more, and are unlikely to do so in the immediate future, because
the product is so new. You have not written anything off these at all’.
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QUESTION 5
During the four week period ending 1 June, the factory produced 1006 units. There were no
breakdowns or absenteeism during the period.
3200 kg of raw materials were used, at a total cost of $7500.
Calculate:
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41
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b. Comment on the material and labour Variances calculated above, giving one possible
reason for the Variance in each case.
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QUESTION 6
Fixed costs: $
Share of advertising 5 000
Share of head office expenses 2 000
Branch rent and rates 5 500
12 500
It is proposed to close the Dover branch. Besides Dover branch cost savings, head office
expenses will be reduced by $500. Watford branch is expected to obtain 30% of Dover
branch’s turnover at the same contribution margin ratio.
REQUIRED
43
Should the Dover branch be closed?
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TEST 6
PAPER 2 Time: 1 hour 30 minutes
QUESTION 1
On 1 January 1998, Pinto started business, manufacturing and selling mibbets. He paid all
his savings of $20 000 into a business bank account and immediately used 75% of it to buy
a mibbet manufacturing machine. The remainder was used as working capital.
The mibbet manufacturing machine users’ handbook estimated that the machine should
produce 280 units for 7 years and then have a residual value of $1000.
It also outlined three possible methods of writing off depreciation on the mibbet machine.
44
Pinto sold his total production of 80 mibbets for $100 000 cash.
He paid for the following:
$000
Materials 70
Fixed expenses 4
Variable expenses 7
(a) Calculate the Break Even Sales revenue assuming alternatively each of the following
methods of depreciation.
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QUESTION 2
A company manufactures and sells a single product at$15 per unit. Unit Production costs
are material $6, labour $3, and Variable overheads $2. Variable selling expenses are 5% of
sales revenue.
Fixed costs are: Production $25 000, selling $15 000 and administration $12 000 spent
each month. Production overheads are absorbed on the basis of a normal production of
20 000 units a month, i.e $1.25 per unit.
45
Sales for the months of November and December were (in units): 20 000 and 22 000
respectively, but production was 23 000 and 20 000 for the two months.
REQUIRED
Prepare Profit and Loss Statements for the months ended using:
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QUESTION 3
Avis travel operates a car rental business. The following information is available from the
fixed assets register on 1 January 1999.
On 12 December 1999, a new BMW Car, number EF 522, was purchased on credit from Leal
Ltd for $7 000. Leal Ltd agreed a trade-in-price of $240 for DJ 128, which the new BMW
replaced.
All BMW Cars are depreciated at 40% per annum using the reducing balance method. They
have a full year’s depreciation charged against them each financial year, regardless of the
date of purchase, except in the financial year of sale, when no depreciation is charged.
REQUIRED
(a) Draw up the BMW Car Provision for Depreciation Account for the year ended 31
December 1999.
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QUESTION 4
The accountant of Sorrow Ltd is preparing the following items for entry in the Company’s
Cash Flow Statement for the year 1998.
(1)Issue of 500 000 Ordinary Shares of $1 each paid in full during the year 1998.
(4)Increase of $6 700 received in closing bank overdraft over opening Bank overdraft.
48
(8)Ordinary dividends of $15 000 paid by Sorrow Ltd in 1998.
Complete the table given in respect of each of the ten items extracted from the company’s
books. For each of the ten items, enter into the box the amount by which it is affected and
use + or – to indicate whether the amount is an increase or decrease. If an item has no
effect write ‘N/E’ in the ‘No Effect Column’.
(1)
(2)
(3)
(4)
(5)
49
(6)
(7)
(8)
(9)
(10)
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McDonald Ltd manufactures three products, all of which use the same machine which is
available for 50 000 hours per period.
Direct materials 70 40 80
Direct labour
Machines($8/hr) 48 32
56 Assemblers($6/hr) 36 40
42 Total Variable Cost 154 112
178
50
Fixed costs are $300 000 per period.
McDonald Ltd could buy in similar quality products at the following unit prices:
A - $175
B - $140
C - $200
(a) Calculate the deficiency in the machine hours for the next period.
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(b) Determine which product(s) and quantities (if any) should be bought out.
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51
(c) Calculate the profit for the next period based on your recommendations in (b).
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TEST 7
PAPER 2 Time 1 hour 30 minutes
QUESTION 1
On 8 July 1998 a business $500 in cash through the mail. It is accompanied only by a note
which reads, ‘please find enclosed towards my bill’. No identification of the sender is
possible.
(a) How would you record the receipt of this amount in the double entry system?
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(b) On 15 July, it is discovered that the money was in fact received from J Bond, a credit
customer. J Bond owed the business $625 at 1 July 1998 and was invoiced a further
$110 on 5 July 1998.
REQUIRED
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QUESTION 2
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(b) Name three methods of depreciating fixed assets other than the straight line
method.
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53
(c) Give three factors which should be taken into consideration before calculating
depreciation.
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(d) A new machine has been bought for $5 000. It is expected to last for five years and
have a residual value of $500.
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(ii) Calculate the depreciation charge against profits and balance sheet values for
each of the five years using reducing balance method.
1 ……………………… ……………………….
2 ……………………… ……………………….
3 ……………………… ……………………….
4 ……………………… ……………………….
QUESTION 3
54
Initial Investment $1 000 000
1 $100 000
2 $300 000
3 $400 000
4 $400 000
5 $300
000
Depreciation is provided on a straight line basis over five years. The scrap value at the end
of the project is zero.
REQUIRED
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(b) Calculate the Accounting Rate of Return for the project based on the average capital
invested.
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55
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QUESTION 4
REQUIRED
(a) Calculate the Net profit for each company after debenture interest has been applied.
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56
………………………………………………………………………………………………………………………………… [2]
(iii) Calculate:
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(iv) Explain the term Earning Per Share and give a formula for calculating it.
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(c) (i) Which of the two companies is highly geared? Explain your answer.
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57
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QUESTION 5
Best Electronics Ltd set the following standard costs per unit for 1998.
Direct Materials
Standard price per kilo $1.20
Standard usage per unit 5 kgs
Direct Labour
Standard wage rate per hour $3.50
Standard time per unit 1.5 hrs
REQUIRED
(a) Calculate the standard cost of one unit and of 12 000 units.
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58
(b) Calculate the actual cost of 12 000 units.
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(c) Calculate the variances and prepare a statement reconciling the actual and the
standard cost for the manufacture of 12 000 units.
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TEST 8
PAPER 2 Time: 1 Hour 30 minutes
QUESTION 1
59
Sales Volume (units) 2 000 3 000
Costs: Materials $4 000 $6 000
Labour $3 500 $5 000
REQUIRED
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(iii) Contribution……………………………………………………………………………………………………
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QUESTION 2
60
(a) Define the principle of ‘substance over form’.
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(b) State two differences between Finance lease and Operating lease.
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(c) Wong Lee purchased a new vehicle on 1 January 1998. The vehicle cost $10 000 and is
expected to be used for 45 000 miles over its five year estimated life. After five years the
vehicle will be sold for $1 000. The anticipated annual use of the vehicle and the estimated
repairs and maintenance are given below:
REQUIRED
A calculation of the total expense to be charged to profit and loss account in respect of the
use of the vehicle in EACH of the five years, including depreciation, which is to be calculated
by each of the following different methods.
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61
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QUESTION 3
You are required to show by means of a sketch, a separate graph of cost behavior patterns
for each of the listed items of expense.
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(b) A standing charge and a unit charge of $1, up to a maximum charge of $1 500.
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62
………………………………………………………………………………………………………………………………… [2]
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(d) Production bonus, which is payable when output in a period exceeds 10 000 units. The
bonus amounts in total to $20 000 plus $50 per unit for additional output above 10 000
units.
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(f) Machine rental costs of a single item of equipment; the rental agreement is that $10
should be paid for every machine hour worked each month, subject to a maximum monthly
charge of $480.
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63
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QUESTION 4
The following information relates to Cashmore Ltd. Current assets and Current liabilities
for each of the two years are given below.
$000 $000
Stock 510 590
Debtors 400 370
Bank 150
164 Creditors 160
180 Interest due 10
12
Net Profit for the year ending 31 December 1998 is estimated to be $210 000, after
accounting for:
$000
Depreciation for the year 25
Debenture interest 18
Loss on disposal 2
REQUIRED
(a) Prepare a statement reconciling operating profit to net cash flow from operating
activities for Cashmore PLC’s Cash Flow Statement for the year ended 31 December 1998.
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64
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(b) Calculate the amount to be included in the Cash Flow Statement for ‘Interest Paid’.
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(c) Outline three measures which may be taken to improve a poor working capital situation
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QUESTION 5
The shareholders’ funds employed in Bony Limited at 31 December 1998 consist of:
$000
1 000 000 Ordinary shares of $0,25 each 250
Retained profits 146
Total 396
65
Apart from current liabilities there are no other sources of finance.
The information given below relates to the actual results of Bony Ltd given in the financial
statements for the year of 365 days.
REQUIRED
(a) Prepare the Trading and Profit and Loss account for the year to 31 December 1998 and
a balance sheet as at that date.
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66
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TEST 9
PAPER 2 Time: 1 Hour 30 minutes
QUESTION 1
67
(a) You would calculate the break even point of a company manufacturing and selling one
type of product.
Give a formula for break even point.
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(b) The current average weekly trading results of Bajaj Restaurant are shown below:
$ $
Turnover 2 800
Operating Costs:
Materials 1 540
Power 280
Staff
340 Building Occupancy Costs
460 2 620 Profit
180
The average selling price of each meal is $4; materials and power may be regarded as a
variable cost varying with the number of meals provided. Staff costs are semi-variable with
a fixed cost element of $200 per week; the building occupancy costs are all fixed.
REQUIRED
Calculate the number if meals required to be sold in order to earn a profit of $300 per
week.
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(c) Explain the accounting treatment required by FRS 10 for ‘Purchased Goodwill’.
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68
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(d) Explain briefly the term ‘Capital Instruments’ as defined by FRS 4 and state the
headings under which ‘Capital Instruments’ are classified in the Balance Sheet of a
Company.
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QUESTION 2
At 31 December, Tom Hank’s cash book showed a debit balance of $1 476. His bank
statement showed a balance on his account of $1 325.
REQUIRED
a) Show the adjustments to be made to the Cash Book and produce a bank
reconciliation statement.
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69
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b) Explain briefly how a company may have reduced its bank balance during an
accounting period but still earned a profit for that same period.
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QUESTION 3
A company has the following capital structure with each type of finance having the cost as
shown.
70
Ordinary Shares (20%) $1 000 000
Preference Shares (16%) $600 000
Debentures (10%) $400 000
Debenture interest is allowable against corporation tax, the latter for the company is 40%.
REQUIRED
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QUESTION 4
The following information has been extracted from the books of Casual manufacturing
company for the year to 31 December 1998.
71
$
Sales 512
400 General expenses 25
400 Office salaries 77
000 Factory overheads 70
000 Finished goods stock – 1 January 1998 24
000 Provision for unrealized profit – 1 January 1998 2
182 Cost of production 316
000
Additional information
1. Stock of finished goods (transfer value) at 31 December 1998 was $30 000.
2. The finished goods are transferred from the factory at the manufacturing cost of
production plus an addition of 10% for factory profit.
REQUIRED
a. Prepare Trading, and Profit and Loss account for the year ended 31 December 1998.
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72
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QUESTION 5
A company charges goods to production on the basis of the AVCO (Average Cost) inventory
method. Details of the receipts and issues for 1998 were:
Receipts Issues
10 January 20@$14 28 February
15 04 April 10@$14 08 May
6 12 June 12@$14.30 09 November
20 05 September 20@$15.10 03
December 18
On 1 January 1998 the stock on hand comprised 7 units with a total value of $96.60.
REQUIRED
Goods Stocks
(ii) Calculate the value of closing stock at 31 December 1998 using Average Cost (AVCO)
method. [1]
73
(b) State one advantage and disadvantage of ‘First In First Out’ and ‘Last In First Out’
methods of stock valuation.
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QUESTION 6
(a) Read the following Break-even Chart carefully and indicate what each lettered item on
the chart constitutes.
F D B
A - …………………………………………………………………………………………………
B - …………………………………………………………………………………………………..
C - ………………………………………………………………………………………………….
D - ………………………………………………………………………………………………….
E - ………………………………………………………………………………………………….
F - ……………………………………………………………………………………………………….
G - ……………………………………………………………………………………………………….
74
H - ……………………………………………………………………………………………………….
[4]
REQUIRED
i. C/S ratio
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TEST 10
75
PAPER 2 Time: 1 Hour 30 minutes
QUESTION 1
a) In the absence of a partnership agreement, state the rules given by the Partnership Act
1890.
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b) Sorrow and Joy were in partnership sharing profits and losses equally. On 31
December 1997, the credit balance on the partners’ capital accounts were Sorrow
$12 000 and Joy $15 000.
On 1 July 1998, Smile was admitted as a partner and from that date onwards
profits and losses were shared in the proportion: Sorrow ½ , Joy 1/3 and Smile 1/6.
Smile introduced $8 000 as capital and $3 000 for his share of Goodwill.
It was agreed the goodwill account should not be retained in the
books. The partners also agreed that adjustments be made as follows:
(1) To increase the value of plant and machinery by $12 000.
(2) To reduce the value of stock by $1 500.
(3) To increase the provision for bad debts by
$100.
The trading profits for the year ended 31 December 1998 was $6 000 which accrued
evenly over the period. Drawings for the year were Sorrow $1 500, Joy $750 and Smile
$4 000.
REQUIRED
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QUESTION 2
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77
Total Costs: $
Materials 5 115
Labour 3 952
Overheads 3 000
12 067
Production was 1 400 fully complete units and 200 partly complete units. The degree of
completion of the 200 units work in progress was as follows:
REQUIRED
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QUESTION 3
78
The following information is taken from the accounts of David PLC.
$ $
Ordinary Share Capital:
100 000 Shares of 50c each 50 000
Share Premium
13 000 Capital Redemption Reserve
12 000 General Reserve
8 000 Retained profits brought forward
27 000 Retained profits for the
year 10 000 37 000 Share Capital and Reserves
120 000
REQUIRED
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QUESTION 4
You are the accountant to a medium size engineering company, and are presented with the
following information relating to the valuation of part of the stock held by that company at
year end.
80
NOTE
1. The historical cost valuation of the electrical circuits has been reached as follows:
Issues:
200 at $40 8 000
160 at $35 5 600 13 600
12 400
REQUIRED
(a) (i) State what principles should be applied to the valuation of stock.
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(ii) Explain clearly what value you, as the accountant, would place on the
stock of the company.
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(b) (i) Give three methods of stock valuation, other than ‘First In First Out’ basis.
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81
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(ii) Explain why one business may use more than one method of stock valuation
in its accounting systems.
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QUESTION 5
Vertex Ltd makes and sells a range of plastic garden furniture. These items are sold in sets
of one table with four chairs for $80 per set.
The variable costs per set are $20 for manufacturing and $10 for variable selling,
distribution and administration.
Direct labour is treated as a fixed cost and the total fixed costs of
manufacturing, including depreciation of the plastic moulding machinery are $800 000 per
annum. Budgeted profit for the forthcoming year is $400 000.
Increased competition has resulted in the management of Vertex Ltd
engaging market research consultants. The consultants have recommended three possible
strategies, as follows:
REQUIRED
$ $ $
1 - - - 414 000
2 - 44 - -
3 30 000 - - -
82
(b) State with reasons, which strategy should be adopted by the company. [2]
Test 11
PAPER 2 Time: 1 Hour 30 minutes
QUESTION 1
The graph shown below depicts labour costs within a standard costing system.
All the variances are unfavourable.
R S T
Wage rate($/h) U V W
X Y Z
Hrs Worked
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83
e) The total labour cost variance
f) Give one reason for the possible cause of variance in each case:
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QUESTION 2
a) Prepare a break even chart to accompany the following profit graph if the selling
price for the product is $1.50 per unit.
Profit ($000) 1
1 2 3 4 output($000)
Loss($000) 2
84
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85
QUESTION 3
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b) The expenses budgeted for the production of 600 units, representing 60%
capacity are given below:
Materials $100 per unit
Labour $40 per unit
Expenses $10 per unit
Factory expenses $40 000 (40% fixed)
Adminstration expenses $30 000
(60% fixed)
REQUIRED
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86
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QUESTION 4
Lee, the book keeper had prepared draft financial accounts from the books of B. Jones for
the year ended 30 September 1998, the following matters in respect of which adjustments
are still to be made, were brought to your attention.
I. In the sales ledger a cheque for $325 paid by customer B. Day had been credited to
customer C. Day’s account in error.
II. The local authority rates assessed on B. Jones’ private house at the sum of $876 had
been paid by the business and debited to the business rates account.
III. A debt of $375 in the name of C. Ford in the sales ledger is to written off as a bad
debt.
IV. A small printing press for use in the business, purchased at a cost of $10 000, had
been debited to the repairs to Machinery Account.
V. The personal drawings account of proprietor B. Jones included $300 for the
purchase of fuel oil used by the business.
VI. The bad debts provision of $1 000 is to be increased by $500.
The Net Profit of the business before making the necessary to adjustments caused by the
above errors and omissions was $76 000.
REQUIRED
(a) Prepare the journal entries necessary to record the adjustments for the above items.
Narratives are not required.
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(b) Complete the proforma statement below to show the effect of each of the errors on the
profits and the corrected net profit.
Deduct Add $
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Net Effect
Adjusted profit
[6]
88
QUESTION 5
The following summarized Trial Balance has been extracted from the books of Chung at 31
December 1998.
$000 $000
Purchases/Sales 170
200 Loan from bank repayable in 2005 -
20 Stock at cost 1 January 1998
17 - Bank Overdraft
- 7 General expenses (including depreciation for
1998) 30 - Debtors/Creditors payable in year 1999
50 25 Drawings
11 - Capital
- 101 Tangible Fixed Assets (book
value at 31 December 1998 75 -
353 353
Chung has been trying to work out some business ratios based on the above Trial Balance,
he is unsure of his calculations and has made three attempts for each ratios as follows:
89
Employed
Complete the table above by indicating in the last column which of Chung’s three attempts
for each ratio is the correct. [12]
QUESTION 6
(a) State three differences between a Receipts and Payments account and an Income and
Expenditure account.
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(b) Explain two different ways of treating, in the accounts, donations received by a club.
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Received $ $
Year ended 31 December 1996 1997
Due year ended 31 December
1995 600
100 1996 6 700
450 1997
150 7 400 1998
- 250
Additional information:
REQUIRED
Prepare the subscription account for the year ended 31 December 1997.
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TEST 12
PAPER 2 Time: 1 hour 30 minutes
QUESTION 1
The total of the list of balances extracted from Morris’ creditors’ ledger on 30 September
1998 amounted to $5676, which did not agree with the balance on the creditors’ ledger
Control account of $6124. On investigation the following errors are discovered:
a) An item of $20 being purchases from Keynes had been posted from the purchase day
book to the credit of Adam’s account.
b) On 30 June 1998, Smith had been debited for goods returned to him, $85, and no other
entry had been made.
c) Credit balances in the Creditors’ ledger amounting to $562 and debit balances
amounting to $12 (Lewis $10, Wood $2) had been omitted from the list of balances.
d) Morris had recorded returns outward of $60. However, these returns were later
disallowed. No record was made when this happened.
e) A Contra of $90 with the debtors’ ledger had been recorded twice in the control
accounts.
f) The purchase day book had been undercast by $100.
g) A payment to Stanlake of $3 for a cash purchase of goods had been recorded in the petty
cash book and posted to his account in the creditors’ ledger, no other entry have been
made.
REQUIRED
a) Prepare the Creditors’ ledger Control account showing the necessary adjustments.
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b) Prepare a statement reconciling the original balances extracted from the creditors’
ledger with the corrected balance on the creditors’ ledger control account.
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QUESTION 2
a) A firm has produced the following budgets for the two activity levels:
REQUIRED
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REQUIRED
Department A Department B
$ $
Net profit before commission 105 000 52 500
QUESTION 3
Sim Lim manufactures portable VCD which they sell at $50 each. The current output is
2000 units per month which represents 80% of capacity. Total costs for the month is $70
000 of which $20 000 is fixed.
Sim Lim Ltd obtains an order from abroad to supply 500 units at $30 each.
REQUIRED
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93
b) State three reasons which may satisfy a firm to accept an order below the normal
selling price.
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QUESTION 1
The following list of balances as at 31 December 1997 has been extracted from the books of
Swallow Ltd.
$
Sales 190 000
Stock at 1 January 1997: Finished goods (800 units) 24 000
Production cost 151
200 Rent
800 Adminstration expenses 11
000 Provision for unrealized profit at January 1 4
000 Factory overheads 2
450
Additional information
REQUIRED
a) A Trading and Profit and Loss Account for the year ended 31 December 1997.
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b) State how the accrual is relevant to the financial statement you have prepared for
(a) above:
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QUESTION 5
The following information is available for Job 745/1, which is being produced at the
request of a customer.
95
$5 Direct labour hours 300 200
400
In accordance with the company policy the following are chargeable to jobs.
REQUIRED
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96
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QUESTION 6
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97
TEST 13
PAPER 2 Time: 1 hour 30 minutes
QUESTION 1
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b) A manufacturing company has three production departments (A, B and C) and one
service department in its factory. A predetermined overhead absorption rate is
established for each of the production departments on the basis of machine hours at
normal activity. The overheads of each production department comprise directly
allocated expenses and a share of the overheads of the service department,
apportioned in the ratio 3:2:5 to Departments A, B and C respectively. All overheads
are classified as fixed.
The following incomplete information is available concerning the apportionment
and absorption of production overhead for a period.
98
Production Department
A B C
Budgeted allocated expenses ($) 143 220 125 180 213 700
Calculate the missing figures for (i) to (v) in the table above.
(i) ……………………………………………………………………………………………………………………………...
(ii) ……………………………………………………………………………………………………………………………...
(iii) ……………………………………………………………………………………………………………………………..
(iv) ……………………………………………………………………………………………………………………………..
(v) …………………………………………………………………………………………………………………………….
[10]
QUESTION 2
a) A business purchased a leasehold property at a cost of $100 000. The lease has a twenty
year life.
After five years, the property prices have fallen sharply and the leasehold in now
worth only $60 000.
Calculate the total expenses charged to Profit and Loss account in year 5.
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99
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(ii) A mine is acquired at a cost of one million. The total extractable quantities
are 200 000 tons.
In 1998, 25 000 tons were extracted by the company.
Calculate the depreciation charge for 1998, using the depletion method.
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(c) State two advantages and disadvantages of the straight line and the reducing balance
method of depreciation.
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QUESTION 3
An extract from the Receipts and Payments Account of Colchetser United for the year
ended 31 December 1997 shows an amount of $9 720 was received from the bar sales and
$6 200 was paid for bar purchases.
100
31 December 1996 31 December 1997
$ $
Subscription in advance 20
65 Bar Stock 3 980
1 210 Bar Creditors 470
360
It has been discovered that bar stock with a resale value of $900 has been delivered, on a
sale or return basis, to a club member and this transaction has not been entered anywhere
in the accounts.
REQUIRED
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101
QUESTION 4
The company produces and sells two products with the following costs:
Product X Product Y
Total sales revenue is currently generated by the two products in the following
proportions.
Product X - 70%
Product Y - 30%
REQUIRED
a) Calculate the Break Even Sales revenue per period, based on the sales mix assumed
above.
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b) Of the fixed costs $455 000 are attributable to product X. Calculate the sales revenue
required on product X in order to recover the attributable fixed costs and provide a
net contribution of $700 000 towards general fixed costs and profit.
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QUESTION 5
102
a) Excel Ltd proposed a final dividend of $18 000 for the year ended 30 June 1998. In
the following year to 30 June 1999 the company made a profit of $75 000 out of
which it declared an interim and a final dividend, totaling $45 000. The final
dividend, $28 000, had not been paid as at 30 June 1999.
REQUIRED
Calculate the dividends actually paid during the year to 30 June 1999.
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b) The following balances have been extracted from the ledger of Chester PLC for the
year ended 31 January 1999.
DR CR
$000 $000
REQUIRED
A Profit and Loss Account for the year ended 31 January 1999 in a form suitable for
publication.
103
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QUESTION 6
$
Direct material 14
Direct labour (4 hours at $3 per hour) 12
Variable Overheads (4 hours at $2 per hour)
8 Fixed Overheads (4 hours at $5 per hour)
20
54 per unit
Best Electronics PLC has offered to supply the above component at a guaranteed price of
$50 per unit.
REQUIRED
104
a) Considering cost criteria only, advise management whether the above component
should be purchased from Best Electronics PLC.
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b) ‘Sunk costs are irrelevant when providing decision making information’. Explain this
statement.
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TEST 14
PAPER 3- CASE STUDY Time: 2 hours 30 minutes
INSTRUCTIONS
The case study on page 106 describes a series of events in the life of a business.
First read the questions below to help you decide what information is relevant. Then read
the case study and the tables on pages 107 to 109.
Read the questions again in more detail and select relevant information from the case study
and the tables in order to answer the questions.
QUESTION 1
a) Prepare the Manufacturing, Trading and Profit and Loss account for the year ended
31 December 1995 and a Balance Sheet as at that date. [20]
b) State how the following concepts are relevant to the financial statements you have
prepared for (a): (i) Accrual concept
(ii) Going Concern concept
[4]
QUESTION 2
105
a) Calculate the total expense to be charged to Profit and Loss account in respect of the
use of the machine in each of the three years, including depreciation, which is to be
calculated by each of the following methods:
(i) Straight line
[5] (ii) Reducing balance
[5] (iii) Usage
[5]
QUESTION 3
QUESTION 4
Use the information given in Table 4 on page 109 to answer this question.
a) Prepare the Profit and Loss account for publication (including relevant notes) of
Mackay Ltd for the year ended 30 April 1997. [20]
b) What is convertible loan stock? Give two advantages of this type of finance. [5]
QUESTION 5
Calculate for the three months ending 31 December 1997 [Use Table 5]:
c) The level of sales at which a profit of $10 000 would be made. [5]
106
CASE STUDY
Mackay is a small manufacturer who manufactures and sells ‘kids umbrellas’ on the local
market. The firm’s depreciation policy is to provide for depreciation of fixed assets on costs
as follows:
Plant and Machinery 10%
Motor Vehicles 25%
The firm transfers finished goods to the trading account at factory cost plus 25% mark up.
The list of balances extracted form the books of the sole trader at 31 December 1995 are
shown in Table 1 on page 107.
Purchase of machine
The demand for kids’ umbrellas is rising and in order to increase production, Mackay
decides to purchase a new machine. The cost of the new machine on 15 February 1996 is
$30 000 and it has an estimated life of three years and a scrap value of $3 000.
Additional information is given in Table 2 on page 108.
107
On 1 May 1996, Mackay Ltd is incorporated to take over the business of the sole trader. The
summarized balance sheet of the sole trader as at 30 April 1996 is shown in Table 3 on
page 108.
Mackay Ltd acquires vehicles and stock at a valuation of $3 000 and $5 000 respectively.
The remaining assets, with the exception of bank, are acquired at book values. These values
are to be introduced into Mackay Limited’s books. The current liabilities are also taken over
by the new company.
The purchase price of the business, $45 000, is settled by the issue of:
Mackay Ltd is considering the launching of a new product ‘Toy umbrellas’ in the Final
Quarter of 1997. Four possible output levels are being considered depending on consumer
reaction. The variable costs associated with these levels are shown in Table 5 on page 109
TABLE 1
$
Stock at 1 January 1995:
Raw materials
3 500 Work in progress
2 500 Finished goods
3 450 Purchase of raw materials
19 000 Manufacturing wages
14 000 Factory overheads:
Variable
8 000 Fixed
4 500
Administration expenses:
Rent and rates 9 500
Heat and light
5 250 Staff salaries
10 690 Sales
96 000 Plant and Machinery:
At cost
108
15 000 Provision for depreciation
6 000 Motor Vehicles:
At cost
8 000
Provision for depreciation 2 000
Creditors 2 750
Debtors 14
000 Drawings 5
750 Balance at Bank 8
300 Capital at 1 January 1995 24
000 Provision for unrealized profit at 1 January 1995
690
Additional information:
b) Rent and rates prepaid at 31 December 1995 is $1 000 and manufacturing wages due at
31 December 1995 is $1 500.
TABLE 2
Details of units produced by the machine and repairs and maintenance costs are as
follows:
2 5 500 1 100
3 4 000 1 800
TABLE 3
109
Balance Sheet as at 30 April 1996
Liabilities $ Assets $
TABLE 4
The following balances have been extracted from the ledger of Mackay Ltd on 30 April
1997.
$ $
Turnover 190 000
Salaries- office 8 000
Salaries- distribution 7 000
Expenses- office 2
000 Expenses- distribution 4
000 Cost of Sales 115
000 Bank interest received
1 500 Extraordinary charges
500 Income from fixed asset investment
2 000 Depreciation written off:
110
Office furniture
2 000 Motor
Vehicles 3 500 Debenture
interest paid 8 000 Interim
dividend paid 2 500
TABLE 5
There are fixed costs of $36 000 and the C/S ratio is expected to be 60%
TEST 15
PAPER 3- CASE STUDY Time: 2 hours 30 minutes
INSTRUCTIONS
The case study on page 112 describes a series of events in the life of a business.
First read the questions below to help you decide what information is relevant. Then read
the Case Study and the tables on pages 113 to 117.
Read the questions again in more detail and select relevant information from the case study
and the tables in order to answer the questions.
QUESTION 1
111
Prepare the Trading and Profit and Loss and Appropriation account for the year ended 31
December 1996 and a Balance Sheet as at that date. [20]
QUESTION 2
a) A statement to show the profit or loss on concert performances for the year ended 30
June 1997. [8]
b) Income and Expenditure account for the year ended 30 June 1997. [10]
QUESTION 3
a) Calculate:
i. Earnings per share
ii. Price earnings ratio
iii. Dividend cover
iv. Dividend yield
v. Earnings yield
vi. Net assets per share. [15]
b) ‘If balance sheet shows a negative working capital position, then the business is certain
to be in ‘financial difficulties’.
QUESTION 4
a) Calculate how many mibbets the partnership firm had in stock at 31 December 1998
assuming that there is no lost or damaged. [3]
b) Calculate the value of closing stock at 31 December 1998 using ALTENATIVELY each of
the following bases:
c) Calculate how many times the firm turned over his stock in 1998 using
ALTENATIVENELY each of the following bases:
112
ii. The number of units in closing stock. [3]
d) Prepare a Trading Account for the year ended 31 December 1998 using a FIFO basis of
stock valuation. [5]
QUESTION 5
b) Calculate the break even point at the two optimum sales level. [4]
c) Explain briefly margin of safety and calculate the margin of safety when sales volume
are 10 000 and 18 000 units respectively. [5]
d) Prepare alongside each other, preferably using the marginal cost format to show clearly
the contribution and profit at the two maximum sales. [6]
CASE STUDY
Adam and Eve started to trade as a dealer in mibbets on 1 January 1996. The partners
completed their first year of trading in December 1996. They shared profits and losses in
the ratio 2:1 and were entitled to 5% per annum interest on capital. Adam was also entitled
to a salary of $1940 per annum.
The firm’s depreciation policy on Van is at the ratio of 10% on cost. A summary of the
partnership cash and bank transactions extracted from the books by the firm’s junior
accountant for they ear 1996 is as shown in TABLE 1 on page 113.
Adam wrote on 4 January 1997 to the junior accountant with additional information in his
letter which he believed would be needed for the preparation of the final accounts for the
year 1996. Adam’s letter is reproduced in TABLE 2 on page114.
113
Preparation of Income and Expenditure account of Remo’s Orchestra Group
Adam and Eve are members of the Remo Orchestra Group. In an annual general meeting
held on 25 July 1997, Adam has been appointed Chairman of the Orchestra group. He is
deeply concerned about the financial situation of the association because of the deficit
incurred last year. Adam requested the treasurer of Remo’s group to supply to the
accountant a draft of the total receipts and payments for the year ending 30 June 1997. A
Receipts and Payments account with additional information for Remo’s Orchestra Group is
shown in TABLE 3.
The partners have decided to buy some shares in a limited company on 31 October 1997.
Adam was reluctant to invest because the investment ratios of the company were not
attractive. The firm’s net assets is shown in Table 4 on page 116.
On 1 January 1998, the partnership firm has no mibbets in stock. The firm has signed a four
year contract to supply a customer with 100 mibbets per month at a selling price of $2500
each.
Additional data is given in Table 5.
The partnership firm intends to develop a new product next year. A summary of report
given by the firm of management consultants on the monthly sales potential and product
costs is shown in TABLE 6.
TABLE 1
A summary of their cash transactions for the year ended 31 December 1996.
Receipts: $
Payments: $
114
Drawings - Adam 1 400
- Eve 1 200
Lodgements 52 190
A summary of the partnership bank account for the year ended 31 December 1996 is also
available.
Bankings: $
Cheques drawn: $
Premises 11 000
Cash float 20
Van 1 600
TABLE 2
25 Waterfall Lane
Reading
4 January
1997
R. Johnson
Junior Accountant
10, Paul Street
Reading
115
Dear Sir,
Referring to our telephone conversation we had last Friday, I am sending you additional
information which you would require to prepare our firm’s annual accounts.
I hope this information will enable you to proceed with the preparation of our accounts.
Yours faithfully
ADAM
TABLE 3
The treasurer of the Remo’s Orchestra has prepared the following receipts and payments
account for the year ended 30 June 1997.
RECEIPTS $ PAYMENTS $
116
Investment income 100 Administration expenses 1100
Members’ Subscription 1375 Purchase of Music Scores 850
Additional information
1. There were 47 orchestral members for the year ended 30 June 1997 and the annual
subscription for the year was $25 for each member.
The balance on the subscription account relates to monies received from members
for the year ending 30 June 1998.
3. The hire of music for concerts and hire of halls figures above did not include $170
and $140 respectively relating to the last concert of the year on 10 May 1997.
TABLE 4
Oceanic Ltd
30 September 1997
$ $
Share Capital, 1 000 000 ordinary
shares of $0.50 each 500 000
Revaluation reserve 50
117
000 Share premium account
100 000 Retained earnings brought forward 40 000
Retained profit for the year 30 000
70 000 Share Capital and reserves
720 000
TABLE 5
2. The partnership firm received a trade discount of 4% on the total value of each
purchase exceeding 300 units.
3. The firm allowed 5% cash discount to its customers for payment received within
one month.
At 31 December 1998:
(A) Adam and Eve calculated that distribution expenses were $80 for each mibbet
delivered to the customer.
TABLE 6
SALES POTENTIAL
118
The sales volume is difficult to predict and will vary with the price, but it is reasonable
to assume that at a selling price of $10 per unit, sales would be between 7500 and
10000 units per month. Alternatively, if the selling price was reduced to $9 per unit,
sales would be between 12 000 and 18 000 units per month.
PRODUCTION COSTS
The partnership has been charged $2 000 for the report by the management
consultants.
If the partners decide to produce and sell the new product it will be necessary for them
to use part of the factory premises which they own, but are leased to a company for a
rental of $400 per month.
TEST 16
Paper 3 – CASE STUDY Time: 2 hours 30 minutes
INSTRUCTIONS
The case study on page 120 describes a series of events in the life of a business.
119
First read the questions below to help you decide what information is relevant. Then read the case study
and the tables on pages 121 to 124
Read the questions again in more detail and select relevant information from the case study and the
tables in order to answer the questions.
QUESTION 1
(a) Calculate the best product mix and the resulting profit for Mc Donald Plc for the month of
December 1994 (12)
(b) Briefly indicate the matters that management should consider when confronted with such a
shortage. (4)
QUESTION 2
(a) Prepare the Profit and Loss account for the year ended 31 December 1995 for Mc Donald Plc
and Epson Plc. (8)
(b) Prepare the Profit and Loss Appropriation account for the year ended 31 December 1995 for Mc
Donald and Epson Plc. (6)
(c) What is the minimum amount that Mc Donald Plc must invest in the Equity of Epson Plc in order
to achieve a controlling interest. (3)
(d) Prepare a balance sheet extract to show how Mc Donald Plc would record its investments in
Epson Plc assuming that 1 100 shares were purchased on 1 January 1996 (3)
QUESTION 3
Using your answer of ‘QUESTION 2’ and data from ‘TABLE 2’ ,calculate the following ratios, for Epson Plc
only, for the year ended 31 December 1995
120
(4) Dividend yield
(5) Price earnings ratio
(6) Dividend cover (12)
(b) Write a brief report giving reasons why Mc Donald Plc may see Epson Plc as suitable investment (4)
QUESTION 4
(a) Prepare a cash flow statement for the year ended 31 December 1997 in accordance with the
revised FRS 1 (22)
(b) Outline three measures to improve a poor working capital situation (3)
QUESTION 5
(a) Mc Donald can purchase only one machine, either Ablex or Combat. Calculate for both
machines:
(1) Pay back period
(2) Accounting rate of return
(3) Net present value
(b) Write a report stating, with reasons, which machine you would recommend the company to
purchase. (5)
CASE STUDY
Mc Donald is a small manufacturing company situated in the market town of Reading. The company
manufactures three types of desks which are designed as MN, PQ and RT.
121
The unit cost statement and sales for the month of December 1994 are given in Table 1 on page 120
The directors of Mc Donald were considering buying shares in Epson Plc as an investment. On 31
December 1995, Epson Plc ordinary shares were quoted on the Stock Exchange at $4 per share
Epson 50%
The summarized financial information is available on the two companies for the year ended 31
December 1995 in Table 2 on page 122.
At 31 December 1996 the financial accountant has prepared budgets for the year ended 31
December 1997.
The company`s balance sheet at 31 December 1996 and the forecast balance sheet at 31 December
1997 are shown in Table 3 on page 123.
After preparing the budget for 1997, the company is planning to increase output to meet the rise in
demand. Mc Donald Plc is considering the purchase of an additional machine to improve production
The company has to choose between two machines: ABLEX and COMBAT
TABLE 1
MN PQ RT
122
Selling price per unit 5.60 5.80 4.90
Direct labor
MN 1600 desks
PQ 2000 desks
RT 1200 desks
All three types are made exclusively from the same basic metal. The metal costs $2.50 per metre. Due to
a shortage of the metal used the suppliers have stated that they can deliver 2100 metres to cover
production during December. This means that management will have to amend production schedules
which in turn will influence the level of sales of the various types of desks. All desks produced in
December are sold.
TABLE 2
123
$ $
TABLE 3
Mc Donald Ltd
Balance sheet at 31 December 1996 and forecast balance sheet at 31 December 1997
124
31 December 1996 31 December 1997
$ $ $ $
25 000 Fixed Assets (net book value)
32 000 Current Assets:
20 000 Stock 27 000
14 000 Debtors
9 000 7 000 Short term Investment
9 600 5 000 Bank
8 400 46 000
54 000 Creditors:
Amounts falling due within one year (12 000)
Creditors (9 000) (1 900)
Taxation (1 200)
Dividends proposed
(1 600) Ordinary (1 800)
(500) Preference (700)
30 000 Net current Assets
41 300 55 000 Total Assets less Current Liabilities
73 300 Creditors: Amount falling due after one
year 5 000 10% Debenture stock
4 000 50 000
69 300
Additional information
i. During the year the company sold fixed assets with a net book value of $4 000
for $3 200.
ii. Depreciation of $3 500 was to be provided against fixed assets for the year
ending 31 December 1997.
iii. Part payment of debenture was made on 1 January 1997.
iv. An interim dividend of $400 was paid to the ordinary shareholders.
TABLE 4
125
Data relating to the two machines
Ablex Combat
$ $
Year 0 Original investment 90 000
100 000 1 Cash savings 25 000
40 000 2 Cash savings 35 000
60 000 3 Cash savings
30 000 10 000 4 Cash savings
40 000 30 000 4 Scrap value
10 000 10 000
The following extract is from the present value table for $1:
Year 12%
1 0.893
2 0.797
3 0.712
4 0.636
126
TEST 17
PAPER 3 – CASE STUDY Time: 2 Hours 30 minutes
INSTRUCTIONS
The case study on pages 127 and 128 describes a series of events in the life of a business.
First read the questions to help you decide what information is relevant. Then read the case
study and the tables on pages 129 to 133.
Read the questions again in more detail and select relevant information from the case study
and the tables in order to answer the questions.
QUESTION 1
a) Prepare a Cash Flow Statement for Wilson enterprises for the year ended 31 December
1993 in accordance with the revised FRS 1. [17]
b) Comment on the financial position of the business as revealed by your answer to (a)
above and by the Balance Sheet as at 31 December 1993 [3]
xQUESTION 2
Following the acquisition of the sole trader business by Wilkinson Ltd on 1 April 1994,
prepare the following:
(i) The Realisation Account, Bank account and Capital account in the sole trader books.
[15]
(ii) The Balance Sheet of Wilkinson Ltd, immediately after the acquisition by the
company of the sole trader business. [10]
QUESTION 3
Use the information given in Table 3 on page 131 to answer this question.
i. Current ratio
127
ii. Liquid ratio
iii. Gearing ratio
iv. Dividend yield
v. Earning per share
vi. Price earning ratio [12]
QUESTION 4
A report, incorporating an evaluation of the financial result of engaging each player by the
net present value method, providing the Blackpool Football Club with information to assist
it in deciding which alternative to adopt.
Indicate any other factors that may be taken into consideration. [20]
QUESTION 5
(a) The management accountant has asked you to prepare an operating statement
reconciling the actual and standard costs for the manufacture of 4700 units.
[10]
(b) Prepare a report for Wilkinson Ltd and briefly explain the reasons for each variance.
[5]
128
CASE STUDY
Profit for the year ended 31 December 1993, $25 200, is after accounting for:
$
Profit on disposal of equipment 430
Loss on disposal of Cars 730
Interest payable 3 000
Wilson’s Balance Sheet at 31 December 1992 and 31 December 1993 are shown in Table 1
on page 129.
On 1 April 1994, Wilkinson Ltd was incorporated for the purpose of taking over the
business of the sole trader.
The summarized Balance Sheet of the sole trader at 31 March 1994 was as shown in Table
2 on page 130.
129
Investment
26 000 Stock
9 000 Debtors
2 000
The current liabilities were also taken over by the new company.
The Purchase Consideration was $150 000, settled by the issue of 140 000 ordinary shares
of $1 each, fully paid.
Wilkinson Ltd is one of the major sponsors of Blackpool Football Club. The club has
suffered a heavy loss due to a decline in receipts.
For the new Football League season 1995 – 1996, Blackpool is considering to acquire the
services of an international player and Wilkinson Ltd has agreed to finance the purchase.
Two international players, Stam and Adam are willing to offer their services to Blackpool.
However, the club is considering the purchase of only one of the two players.
Wilkinson Ltd operates a standard costing system for its new product. Its production
budget for the month of January 1995 is given in Table 5.
130
Table 1
Wilson Enterprise
31 December 92 31 December 93
Current Assets
27 500 Stocks 19 670
14 410 Debtors and Prepayments 11 960
3 600 Short Term Investment 4 800
1 800 47 310 Cash and Bank balances 700 37 130
Current Liabilities
20 950 Creditors and Accruals 32 050
(20 950) Bank Overdraft 28 200 (60 250)
103 040
103 610
Financed By
67 940 Opening Capital 75 040
4 000 Capital Introduced/(withdrawn) (6 500)
15 300 Profit for the year 25 200
(12 200) 75 040 Drawings (15 130) 78 610
131
Table 2
$ $
Fixed Assets (N.B.V)
Freehold Premises 35 000
Equipment 50 000
Cars
6 000 91 000 Investment (Long Term)
25 000
Current Assets
Stock 10 000
Debtors 3 000
Bank 1 000
14 000
Current Liabilities
Creditors 20 000 (6
000) 110
000
Financed By
Opening Capital 103
610 Profit 6
390 110
000
132
Table 3
Wilkinson Ltd
$ $ $
Fixed Assets
Intangible Assets
Goodwill
25 000 Tangible Assets
Freehold Premises
48 000 Equipment
52 000 Cars
8 000 108 000 Investment (Long Term)
26 000
Current Assets
Stock 14 000
Debtors 20 000
Bank 12 000
46 000
Current Liabilities
Creditors 13 000
Dividend Proposed 7 000 20 000
26 000
185 000
133
140 000 Share Premium
10 000 Retained Profit
15 000 6% Debentures
20 000
185 000
Table 4
The Blackpool Football Club are languishing in the middle of the Premiership Division of
the Football League. The club suffered a loss of $200 000 in their last financial year and
whilst receipts from spectators have declined over the last five years, recently receipts
have stabilized at approximately $1 000 000 per season. The club is considering the
purchase of the services of one of the two players, Stam and Adam.
Adam is 32 years old and a leading international footballer who is prepared to sign for
Blackpool on a two year contract before retiring completely from football. He would expect
a salary of $200 000 per annum and his present club would require a transfer of $100 000
for the transfer of his existing contract. Blackpool believe that as a result of signing Adam
receipts would increase by 40 per cent.
The following extract is from the present value table for $1:
12%
Year 1 0.893
Year 2 0.797
134
Year 3 0.712
Year 4 0.567
Table 5
Standard Costs $
135
TEST 18
PAPER 1 Time: 1 hour 15 minutes
A. Bank Statements
B. Petty Cash Book
C. Journal
D. Sales returns day book
3. Stocks are valued at the lower of cost and net realizable value.
The table gives information about the closing stock of Exportex PLC.
Cost $2350
136
Expected Selling Price $2480
A. $2350
B. $2480
C. $2300
D. $2280
A. Consistency
B. Materiality
C. Adequate disclosure
D. Periodicity
If the directors recommend an ordinary dividend of $0.10 per share for the year ended
31 December 1996, what is the total amount of dividends payable for the year?
6. If a purchase return of $100 had been wrongly posted to the debit of the sales return
account, but had been correctly entered in the supplier’s account, the totals of the trial
balance would show:
7. Your bank statement shows a balance at the year end of $260 overdrawn. The
statement includes bank charges of $1041 which have not been entered in your cash
book. There are also unpresented cheques totaling $645 and cash paid in for $97
137
which has been entered in your cash book but not yet been credited by the bank. The
bank balance which should appear in your balance sheet should be:
A. $233 in hand
B. $260 overdrawn
C. $288 in hand
D. $808 overdrawn
9. A company’s usage of raw materials during a year was $24700. Direct labour costs amounted to
$38900, production overheads to $12600 and administration overheads to $6800. Opening
work in progress was $3900 and closing work in progress was $4300.
In the company’s manufacturing account, factory cost of finished goods produced is:
10. A company absorbs overheads on machine hours which were budgeted at 11 250 with
overheads of $258 750. Actual results were 10 980 hours with overheads of $254 692.
Overheads were:
11. When comparing the performance of two factories, one of which is owned and the other
rented, the inclusion of rent as an expense in the profit statement of the factory owned
is known as the inclusion of:
A. Relevant cost
B. A normal cost
C. A notional cost
D. A controllable cost
138
A. Required by the Companies Act 1985 to apply to the financial statements of limited
companies.
B. Accepted by the accountancy profession to be the desirable characteristics of useful
information.
C. Required of companies listed on a recognized stock exchange by the Fourth Directive of the
European Economic Community Commision.
D. Conditions imposed by the International Monetary Fund on the financial statements of the
central bank of nations applying for loans.
13. Which one of the following accounting concepts is not one of the fundamental concepts
identified by SSAP 2?
14. Which of the following would not offer the gearing ratio of a company?
15. X and Y having shared profits and losses equally, admitted Z to the partnership on 1
January 1999. The profits sharing ratio was to be thereafter:
X - 3/6
Y - 2/6
Z - 1/6
Z paid in $5000, $3000 of which was for fixed capital and the balance as goodwill. The
goodwill of the firm, which was not to appear on the Balance Sheet, was valued at
$6000. Separate capital and current accounts are maintained.
What is the balance on Z’s current account after the entries for his admission have been
made?
16. Which of the following will not alter the total net assets of a business?
139
17. Ben’s business had debtors of $100 on 1 January 1999 and $90 at 31 December 1999.
Credit sales amounted to $790 and cash received form debtors was $770; a bad debt of
$10 was written off.
18. The accountant of Sintex Limited gives you the following information for the year ended
31 December 1997:
A. Depreciation
B. Bad debts provision
C. Profit on disposal of fixed assets
D. Decrease in debtors
20. On X’s retirement Y and Z decided to share profits and losses in the ratio 3:2 instead of
3:2:1.
The balance sheet values of certain assets were adjusted as follows:
X Y Z
$ $ $
A. 15 000 15 000 -
B. - 18 000 12 000
C. 15 000 10 000 5
000 D. 18 000 12 000
6 000
140
21. Pauline started a business on 1 January 1998 with $10 000 capital. During the year
1998 he drew $5000 out of the business and paid in a legacy of $3000 from his uncle. At
31 December 1998 the business’s net assets were valued at $18 000.
22. Under the Companies Act 1985, which reserve is not available for distribution as cash
dividends?
A. Retained profit
B. General reserve
C. Capital redemption reserve
D. Dividend equalisation reserve
23. The following details relate to Jeans Ltd in respect of its accounting year ended 30
September 1998.
i. A contra between sales ledger and purchase ledger for $470 had not been reflected
in the personal accounts and the purchase ledger control account.
ii. Stock at 30 September 1998 at cost $1300 has not been recorded in the nominal
ledger.
iii. Discount allowed of $50 had not been posted in the discounts allowed account in
the nominal ledger.
If a trial balance is extracted at 30 September 1998. What balance would appear on the
suspense account.
24. Helly Ltd manufactures and sells two products – Jelly and Kimo. Annual sales are
expected to be in the ratio of Jelly : 1 and Kimo : 3. Total annual sales are planned to be
$420 000. Product Jelly has a contribution to sales ratio of 40% whereas that of product
Kimo is 50%. Annual fixed costs are extimated to be $120 000.
The budgeted break-even sales value (to the nearest $1000) is:
25. In a period 11 280 kilograms of material were used at a total standard cost of $46 248.
The material usage variance was $492 adverse.
What was the standard allowed weight of material for the period?
141
26. An asset costs $15000. It has an estimated useful life of five years, after which its
residual value will be $1000.
If the reducing balance method is used at 40% p.a, what is the depreciation charge to
Profit and Loss account in the third year?
Cost
Level of activity
28. At 30 September 1997 what amount should be shown in the Club’s balance sheet as
‘Subscriptions in arrears’?
142
29. What amount should be credited to the Club’s income and expenditure account in
respect of subscriptions for the year ending 30 September 1998?
30. Extracts from Pony Ltd records for last month are as follows:
Budget Actual
A. $288 favourable
B. $288 adverse
C. $912 adverse
D. $1200 adverse
31. For a company that does not have any production resource limitations, in what
sequence would the following budgets be prepared?
1. Cash budget
2. Sales budget
3. Stocks budgets
4. Production budgets
5. Purchases budget
A. Sequence 2,3,4,5,1
B. Sequence 2,3,4,1,5
C. Sequence 2,4,3,5,1
D. Sequence 4,3,2,1,5
32. Autocar Ltd purchases a machine for which the supplier’s list price is $18 000. Autocar
pays $13 000 in cash and trades in an old machine which has a net book value of $8000.
It is the company’s policy to depreciate such machines at the rate of 10% per annum on
cost.
What is the net book value of the machine after one year?
33. A project has an internal rate of return of 14% and the firm’s cost of capital is 12%. At
the cost of capital the net present value will be:
143
A. Positive
B. Zero
C. Negative
D. Equal to the IRR
The following data are used for questions 34 and 35. A firm with a cost of capital of
12% is considering a project with the following cash flows:
Year 0 1 2 3 4
35. What is the project’s internal rate of return (nearest %) assuming net present value to
be ($314) at a discounting rate of 28%.
A. The difference between budgeted sales and the break even sales.
B. The difference between actual sales and budgeted sales.
C. Sales minus variable costs.
D. The difference between zero sales and break even sales.
37. Which one of the following items would not normally be classified as administration
expenses in an analysed profit and loss account?
Capital Structure $
Ordinary Share Capital 25 000
10% Preference Share Capital 20 000
12% Debentures 80 000
Reserves 10 000
144
A. 26% B. 80% C. 59% D. 74%
40. The table shows the forecast cash flows arising from the purchase of a new machine
costing $50 000.
Year $
1 20 000
2 25 000
3 10 000
4 8 000
TEST 19
PAPER 1 Time: 1 hour 15 minutes
1. What is a reserve?
A. An asset
B. A liability
C. A charge against profit
D. An appropriation of profit.
145
A. Debited to the Profit and Loss Account.
B. Credited to the Profit and Loss Account
C. Debited to the Appropriation Account.
D. Credited to the Appropriation Account.
4. Which one of the following will not form part of the shareholders’ funds of a company?
A. Ordinary shares
B. Preference shares
C. Bank loans
D. Bank balance
6. Stocks are valued at the lower of cost and net realizable value. The table gives
information about three items of stock.
Item A B C
Cost ($) 20 16 12
7. Fowler goes into business with $25 000 capital and agrees to buy Owen’s shop for
$12000. Owen’s recent accounts show net assets of $8 000 which Fowler values at
$9200.
8. At the beginning of the accounting year 1 January 1996, the subscription in arrears was
$20, while the subscription received in advance was $25. During the year, subscription
of $205 was received, out of which $45 was subscription for 1997. At the end of the
year 31 December 1996, subscription in arrears was $5.
What amount should be credited to the Income and Expenditure account for 1996?
146
9. If a partner withdraws some stock for his own use, what is the correct double entry?
Debit Credit
10. If a new partner is to be admitted to a firm, and goodwill is not to appear in the firm’s
balance sheet, what are the adjusting entries between the partners?
Debit Credit
11. A trader’s accounts showed a gross profit for the year of $27 200. After the accounts
were prepared it was found that the opening stock had been overstated by $1 200 while
closing stock had been understated by $1 700.
12. A rates prepayments of $250 was treated as an accrual in preparing a trader’s profit
and loss account. As a result, his profit was:
A. Understated by $500
B. Overstated by $500
C. Understated by $250
D. Overstated by $250
13. When comparing shareholders and debenture holders, which one of the following
statements is untrue?
147
14. During the year ended 31 December 1998 the net assets of Kevin’s business increases
from $18 000 to $21 000. He drew $6 000 out of the business and paid in a football
pools win of $12 000.
A. $3 000 Profit
B. $3 000 Loss
C. $9 000 Profit
D. $9 000 Loss
15. William started a business on 1 January 1998. The following information is available for
the year ended 31 December 1998.
$
Cash received from customers 20 150
Cash paid to suppliers 21 120
Trade debtors at 31 December 1998 5 960
Trade creditors at 31 December 1998 2 340
Mark up on cost 40%
17. A company, with an existing issued share capital of $300 000 $1 ordinary shares, made
a 2 for 5 Bonus Issue. This was later followed by a 2 for 3 Rights Issue.
What will be the balance on the share Capital Account after these transactions?
148
A. $300 B. $500 C. $700 D. $420
18. Which one of the following can be used to calculate the ‘Earning Yield’.
20. Which of the following will reduce the net assets of a business?
21. Returns outwards of $200 have been debited to the creditor’s account as $20. A
Suspense Account is created to complete the trial balance.
22. A company’s authorized share capital is 5 000 000 ordinary shares of $1 each. 4 000
000 have been issued and have a market value of $3 each. At 31 December 1996, the
profit before tax is $2 000 000 and taxation proposed for the year is $500 000.
A. 6 B. 7.5 C. 8 D. 10
23. A company’s cash book shows a debit balance of $140. The bank statement as at the
same date shows an overdrawn balance of $42. Which one of the following timing
differences could account for the discrepancy?
149
A. Cheques drawn but not yet presented amounted to $98.
B. Cheques received but not yet cleared amounted to$98.
C. Cheques drawn but not yet presented amounted to $182.
D. Cheques received but not yet cleared amounted to $182.
Debit Credit
$ $
Debtors Control Account 15 500 750
Bank Account 1 200
Cash 500
Which total for current assets should be disclosed in the company’s financial statements
at 31 December 1999.
25. Which of the following is not required to be disclosed in the published company
accounts?
A. Chairman’s emoluments
B. Payment of rent
C. Hire of Plant
D. Auditors’ fees.
26. $
0 output
150
The following data are to be used for questions 27 and 28.
27. Based on the data given above, what is the labour hour overhead absorption rate?
28. Based on the data given above, what is the amount of overhead under/over absorbed?
30. A company manufactures three products for which the following details (per unit) are
available:
Product K L M
Contribution $8 $16 $14
Material (kgs) 6 10 12
If material is limited in supply, which order of priority should the company adopt when
planning its production?
First Last
A L M K
B K L M
151
C L K M
D K M L
The standard cost of the making of one Polo Shirt in De Costa’s Workshop is
The actual cost of 1 000 Polo Shirts made is calculated at 2 700 metres @ $1.60 a metre
and 1 550 hours @ $2.80 an hour.
A. $180 favourable
B. $270 adverse
C. $450 favourable
D. $180 adverse
A. $150 adverse
B. $310 favourable
C. $160 favourable
D. $150 favourable
33. A company has a current ratio of 1,8: 1 and a quick ratio of 0.6: 1.
What is the effect on the two ratios, if the company receives payments from debtors.
34. A firm with fixed costs of $10 000 makes a profit of $2 000 on a turnover of $36 000.
152
A. $24 000 B. $34 000 C. $30 000 D. $38 000
35. Which accounting concept dictates that fixed assets shown in a balance sheet should be
at cost less accumulated depreciation?
A. Matching concept
B. Going concern concept
C. Prudence concept
D. Consistency concept
36. If sales are $140 000 and mark up 40%, what is the gross profit?
37. According to SSAP 21 Accounting for leases and hire purchase contracts, in the books of
the lessor an asset under a finance lease:
38. A company is considering an investment of $100 000 which will yield the following
annual net cash flows over the four-year life span.
153
A. $33 000 B. $6 924 C. $10 000 D. $13 300
39. Texas garments uses a standard costing system. The following details relate to
December 1999.
40. A manufacturing company transfers finished goods from factory to warehouse at cost
plus 5%. At 31 December its stocks of finished goods, valued at transfer prices, have
been as follows:
1998 $924
1999 $1092
In the profit and loss account for the year ended 31 December 1999 the adjustment for
unrealized profit should be:
TEST 20
PAPER 1 Time: 1 hour 15 minutes
154
A. Legal fees incurred in the purchase of leasehold premises.
B. Computer repairs and maintenance costs.
C. Cost of new machinery.
D. Customs duty charged on the purchase of machinery from abroad.
3. A company has an authorized share capital of 1 000 000 $0.5 ordinary shares and an
issued share capital of 800 000 $0.5 ordinary shares. If an ordinary dividend of 5% is
declared, the amount payable to shareholders is:
4. Sally holds 5 000 ordinary shares of $1 each in Rapid Ltd. He has paid in full all the calls
made amounting to $0.75 on each share. If the company runs into financial difficulty,
Sally will be liable at most for:
5. What should be shown on the face of a company’s published Profit and Loss Account?
A. Shown shown
B. Not shown shown
C. Not shown not shown
D. Shown not shown
6. The corporate report identifies seven categories of people having a right to financial
information about companies. Which one of the following is not included in the list?
A. Shareholders
B. Managers of the company
C. Government
D. Loan creditor
7. Alan, Ben and Chris are in partnership sharing profits in the ratio 5:3:2. Alan is entitled
to interest of $800 on a loan to the firm. Chris is guaranteed a minimum profit share of
$5000. When the profit is $20 000, the profit shares will be:
155
B. Alan $7 000 Ben $4 200 Chris $5 000
C. Alan $8 875 Ben $5 325 Chris $5 000
D. Alan $9 875 Ben $5 925 Chris $5 000
8. What is the correct double entry for recording the surplus on revaluation of a
partnership fixed assets?
Debit Credit
9. An item of stock has a cost of $50 and a net realizable value of $48. Which of the
following concepts dictates the amount at which it should be stated in the balance
sheet?
10. A company operates in a country where the price level is falling. The use of LIFO (Last
In First Out) rather than FIFO (First In First Out) stock valuation will:
$
Ordinary shares $0.50, fully paid 100 000
Preference shares 7%, fully paid 40 000
$ $
Profit before tax 47 000
Corporation tax 13 000
156
34 000
15. Which one of the following items would not appear in a debtors control account?
A. Returns inwards
B. Discounts allowed
C. Provision for doubtful debts
D. Interest charged on overdue accounts.
157
barman’s wages of $50 per week were paid from till receipts. Bar purchases during
the year amounted to $21 200.
Bar prices are fixed so as to achieve a uniform gross profit percentage of
40%.
17. What is the net profit on bar trading disclosed in the club’s income and expenditure
account for 1995?
18. What are the two additional statements which the Corporate Report recommended to
be published with the traditional final accounts?
19. During the year to 31 December 1999 a company paid the final dividend for the year ended 31
December 1998 in the sum of $400 000. It also paid interim dividends on account of the year to
31 December 1999 amounting to $150 000. The directors propose paying a final dividend for
the year of $200 000. The entry in the profit and loss account for the year ended 31 December
1999 for dividends will be:
21. Which one of the following would NOT help to explain a favourable direct materials
usage variance?
158
GRAPH 1 GRAPH 2
total costs Total costs
GRAPH 3 GRAPH 4
Total costs Total costs
Which graph best depicts the costs described in question 22 and 23.
22. The rental of a machine for which the charges are $30 per hour, subject to a minimum
charge of $500 and a maximum charge of $3 000.
23. The rental of a vehicle for which the charge is $2 per mile travelled, with a maximum
charge of $2 000 for the period.
24. The total of the discounts column on the debit side of the cash book, recording cash
discounts deducted by customers when paying their accounts, is posted to:
159
25. In the absence of any agreement to the contrary, the Partnership Act 1980 prescribes
that salaries should be paid:
B. 1
Earning yield
27. Chang Ltd manufactures product Z and uses a standard costing system. During
December, the following results were recorded for the company’s operations.
28. The following extract is taken from the production cost budget of Simco Ltd.
160
29. There are a number of methods of apportioning reciprocal service departments’
overheads to the production departments. The most frequently used are:
30. Jessica calculates her bank balance to be $160 positive, however her bank statement
shows a different amount.
Having considered the following items, calculate the balance in Jessica’s bank
statement.
i. A cheque that Jessica paid into the bank for $40 is still outstanding.
ii. A cheque for $60 paid by Jessica to Belinda has not yet been presented.
iii. Jessica has forgotten to record a cash withdrawal of $30.
iv. When Jessica inspects her bank balance she sees that the bank has deducted charges
of $15 form her account.
A. If a company reduces its selling price by 10% and sales volume increases by 11% as
a result, then the profit earned by the company would not change.
B. Fixed costs are items of costs which remain the same regardless of the volume of
output.
C. All direct costs are variable costs.
D. Sunk costs are irrelevant when providing decision making information.
32. Holiday Inn Ltd produced the following units (with associated total cost) for a recent
five month period.
Units Total Cost
$
August 5 400 38 020
September 5 000 37 500
October 8 400
45 660 November 8 300
45 050 December 5 900
39 420
If x = the number of units produced, an equation which can be used for forecast total
cost based upon units produced is:
161
D. $25 000 + $2.4x
33. What effect does a payment made to trade creditors have on the Current ratio and
Quick ratio of a company?
A. No change No change
B. No change Decrease
C. Increase Increase
D. Increase Decrease
34. The profit by a business in 1999 was $5 000. The owner injected new capital of $2 000
during the year and withdrew a monthly salary of $100.
If net assets at the end of 1999 were $12 000, what was the owners’ capital at the
beginning of the year?
35. Roberto Ltd uses standard costing. It purchases a small component for which the
following data are available:
36. A soletrader withdrew business stocks for his own use. The goods had cost $300 but no
entries were made in the ledger.
162
A. Understated $300
B. Overstated $300
C. Overstated $600
D. Correctly stated
37. A business with fixed costs of $3 000 makes a profit of $750 on a turnover of $15 000.
What is the break even point expressed in terms of sales revenue?
38. A company has authorized share capital of 2 000 000 $0.5 ordinary shares. The amount
payable to shareholders is $30 000 when an ordinary dividend of 5% is declared.
39. A project is forecast to cost $350 000 with varying annual cash inflows. The net present
value has been calculated at two discount rates as shown:
12% + $1 800
15% - $600
40. A project involves the immediate purchase of an item of plant costing $110 000. It
would generate annual cash flows of $24 400 for five years, starting in Year 1. The plant
purchased would have a scrap value of $10 000 in five years, when the project
terminates. Depreciation is on straight line basis.
TEST 21
PAPER 1 Time: 1 hour 15 minutes
163
1. Lamco Limited shows the following items as ‘reserves’ in its accounts. Which one of
them is wrongly classified?
4. James starts a business and introduces capital of $25 000. He also obtains a loan of $5
000 to purchase fixed assets.
5. A company receives a discount of $50 from a supplier. The amount is debited to the
discount received account. As a result, gross profit is:
A. Understated $50
B. Understated $100
C. Overstated $50
D. Unaffected
6. King and Jack, partners in a firm, share profits in the ratio 3 : 2. For one year the net
profit is $50 000. Additional data is as follows:
164
King Jack
$ $
Interest on loan to firm - 1 200
Interest on Capital 1 200
1 500 Interest on drawings 400
600 Salary 1 000
-
7. A company has 500 000 $1 ordinary shares in issue and makes a bonus issue of 100 000
$1 ordinary shares. Its only available is the profit and loss account balance $120 000.
The shareholders fund after the bonus issue would amount to:
A. Share warrants
B. Loans
C. Fixed assets
D. Share options
9. A company raises cash by issuing 100 000 $1 ordinary shares at a price of $1.2 a share.
What is the effect on the company’s equity and net current assets in the year of issue?
A. Increase Decrease
B. Increase Increase
C. Decrease Increase
D. Decrease Decrease
165
A. Total actual overhead cost
total budgeted machine hours
11. Rocky has obtained a legacy of $10 000 from his aunt. He is willing to invest, but his
main objective is to have a fixed income with minimum risks.
A. Debentures
B. Preference shares
C. Ordinary shares
D. Loan stock
166
15. The following budgeted and actual data relate to production activity and overhead costs
in Rolex Ltd.
Budget Actual
Production overhead: Fixed $36 000 $39 000
Variable $9 000 $12 000
The company uses an absorption costing system and production overheads are
absorbed on a direct labour basis.
A. Under-absorbed by $1 000
B. Over-absorbed by $1 000
C. Under-absorbed by $5 000
D. Under-absorbed by $6 000
17. The current liabilities of a business total $15 000. The current ratio was 1.5 : 1 and the
quick ratio 0.8 : 1.
18. Pekins PLC has an authorized share capital of 200 000 $0.5 ordinary shares and as
issued share capital of 170 000 $0.5 shares issued at price of $0.7. The market value of
the shares is currently $0.8.
What figure should be included in the balance sheet under the heading ‘ordinary share
capital’?
167
19. If a dividend of 7% is declared the amount payable to the shareholder will be:
20. Which of the following does not form part of a limited company’s equity capital?
A. Valuation principle
B. Matching concept
C. Prudence concept
D. Historical cost convention.
A. May only be paid when there is a profit, and is debited to profit and loss account.
B. May only be paid when there is a profit, and is debited to appropriation account.
C. Must be paid even if there is no profit, and is debited to appropriation account
D. Must be paid even if there is no profit, and is debited to profit and loss account.
23. ‘The quantity in stock is added to the quantity purchased, the value of the quantity in
total is then divided into the second total’.
The method of pricing materials issues from stores described above is called:
24. Zamako Ltd manufactures a single product, the budgeted selling price and variable cost
details of which are as follows:
$
Selling price 15.00
Variable costs per unit:
Direct materials 3.50
Direct labour 4.00
Variable overheads 2.00
168
Budgeted fixed costs are $60 000 per annum charged at a constant rate each month.
Budgeted production is 30 000 units per annum.
In a month when actual production was 2 400 units and exceeded sales by 180 units,
the profit reported under absorption costing was:
25. What is the correct treatment required by FRS 10 for non purchased goodwill?
26. Nissan Ltd, a small transport company, operates with just two vehicles, and has
produced the following forecast for the next year.
The break even point for the year, in operating Kilometres, is:
27. Which one of the following would NOT explain an adverse direct labour efficiency
variance?
169
C. Earning per share
Dividend Yield
D. 1
Price Earning ratio x100
31. A firm with fixed costs of $3 000 has a turnover of $10 000 and break even point
expressed in terms of sales value of $7 500. What is the profit made by the firm?
170
32. During a period 17 500 labour hours were worked at a standard cost of $6.50 per hour.
The labour efficiency variance was $7 800 favourable.
Total costs
0 Volume of output
34. Maurex Ltd has recorded the following data in the two recent periods:
What is the best estimate of the company’s fixed costs per period?
35. If actual output is lower than budgeted output, which of the following costs would you
expect to be lower than the original budget?
171
36. A company uses a standard costing system. The standard material cost per unit is 4
kilos at $0.5 per kilo.
5 000 units were produced. 19 800 kilos of material were used at a cost of $10 296.
What were the material price variance and the usage variance?
The following data is given for the project. The company’s cost of capital is 10%.
38. What is the Accounting Rate of Return of the project (based on initial capital invested)
39. The net present value of the project (to the nearest $) is:
172
CLASSIFIED QUESTIONS
A DEPRECIATION
B CONTROL ACCOUNTS
C STOCK VALUATION
D PARTNERSHIP
E INCOME AND EXPENDITURE ACCOUNTS
F INCOMPLETE RECORDS
G MANUFACTURING ACCOUNTS
H RATIO ANALYSIS
I SUSPENSE ACCOUNTS
J BUDGETING
K OVERHEADS
L CAPITAL INVESTMENT APPRAISAL
M MARGINAL COSTING AND ABSORPTION COSTING
N DECISION MAKING
173
[A] DEPRECIATION
REQUIRED
In the published accounts of Bridges Limited the schedule of fixed assets for the year ended
31 October 1989 appeared as follows:
Depreciation
At beginning of year 315 225 540
Charge for the year 99 150
249 On disposals (115) (95)
(210) At end of year 299 280
579 N.B.V at end of year 691
320 1 011
During the year ended 31 October 1990 the following changes took place in fixed assets:
1. New equipment was purchased for $180 000 and $260 000 on 1 December 1989 and
3 June 1990 respectively. Equipment purchased on 30 October 1985 for $100 000 was
sold on 4 March 1990 for $44 000.
2. On 1 August 1990 four new vehicles were purchased costing $70 000 each. A part-
exchange allowance of $15 000 per vehicle was received for two vehicles which each
cost $50 000 on 30 June 1987.
3. The company’s policy is to depreciate the cost of all fixed assets in use at the end of
the financial year using the straight-line method. No depreciation is provided on an
174
asset in the year in which it is sold or otherwise disposed of.
The same rates of depreciation as used in the year ended 31 October 1989 ar also to
be used in the year ended 31 October 1990.
REQUIRED
(f) A disposal account showing separately the profits or losses from disposals of
equipment and vehicles.
(g) A schedule of fixed assets for the year ended 31 October 1990 as it would appear in
the company’s published accounts. The schedule must be in the same format as that
shown in 1989.
2. Oundile Limited hires out large vans for use by haulage contractors. The vehicles are
used on Continental journeys as far as Eastern Europe and also throughout the United
Kingdom.
The company purchases all its vans new and old and they have an effective life on
continental routes of three years or typically 120 000 miles after which company policy
is to use them in the United Kingdom for a further period of two years or 60 000 miles.
Vans are always purchased on 1 August and no vans are kept longer than five years. All
vans are maintained under contract agreements with the local supplying agent.
In the past the Company has provided depreciation at 25% per annum using the
reducing balance method (ignoring any anticipated residual value), but it has found that
when the vans come to be sold, typically for $10 000 at the end of five years, a loss on
sale has to be written off to profit and loss account.
Draft accounts for the year ended 1 July 1990 have been prepared in accordance with the
Company’s usual practice but the directors have asked you to review their depreciation
policy and advise them.
REQUIRED
175
i. Reducing balance method.
ii. Straight line basis
iii. A basis which takes van mileage into account.
(C) Recommend to the Directors, giving reasons, which method should be used to
depreciate the company’s vans.
3. The financial accountant of the Great Poland Street PLC has prepared the company’s
balance sheet as at 30th June 1991.
Motor Vehicles $
During the financial year to 30th June 1992, the following motor vehicles transactions
took place:
SALES
Date of purchase Item Date of Sale Original cost
Sale Proceeds
$ $
1st Jan 1989 Motor Car 30th Sept 1991 6 500 1
500 1st Oct 1987 Motor Lorry 31st Dec 1991 10 000 1
300 1st July 1989 Motor Car 31st March 1992 9 000 1
100 1st Jan 1990 Motor Van 30 April 1992
th
12 000 8
500
PURCHASES
Date of Purchase Item Cost
$
th
1991 30 Sept Motor Car 7 500
31st Dec Motor Van 11 000
st
1992 31 March Motor Car
8 000 30th April Motor Lorry
14 000
Depreciation is charged at 20% per annum on cost over an assumed 5 year life. No
allowance is made for residual value. A full year’s depreciation is charged in the year of
purchase but no charge is made in the year of disposal.
176
REQUIRED
a) Prepare for the financial year to 30th June 1992: (i) a Motor Vehicle Account; (ii) a
Motor Vehicles Provision for Depreciation Account; (iii) a Motor Vehicles Disposal
Account.
b) Prepare a balance sheet extract as at 30th June 1992 so far as Motor Vehicles and
related depreciation provision are concerned.
c) Explain how the reducing balance method of calculating depreciation is calculated.
What are its attractions compared to the straight line method?
d) ‘Although depreciation is non-cash expense it is very important in year end
accounts’.
Explain what this statement means.
4. Tengah Presswork Ltd bought a new machine for $100 000 on January 1993. The
company policy is to replace its plant and machinery when it is five years old. When the
machine is disposed of at the end of 1997 after 18 000 hours usage, it is expected that it
will have a market value of $10 000.
The anticipated annual use of the machine and the estimated repairs and maintenance
are given below:
REQUIRED
a) Calculate the total expenses to be charged against revenue in respect of the use of
the machine in each of the five years. The depreciation is to be calculated for every
year using each of the following different methods:
i. Straight line method, without taking account of machine usage.
ii. Reducing balance method without regard to the machine usage
(1 – n s = 0.36 approx)
c
177
1. The following information has been extracted from the books of G Elm, trader, for the
month of October 1994.
$
Sales Ledger Balances at 1 October DR 72 950
CR
1 075 Purchases Ledger Balances at 1 October
DR 835
CR 64 410
REQUIRED
(a) Prepare Sales Ledger and Purchase Ledger Control Accounts for October 1994.
(b) List briefly the uses and advantages of Control Accounts.
(c) Explain briefly how a contra entry might arise.
2. The following information relating to the month of August 1992 is taken from the books
of Lui Snuk Wah. She maintains both Sales and Purchases (suppliers) Ledgers Control
accounts as part of the double-entry accounting system.
178
41 580 Credit
600 Balances on suppliers’ accounts at 1 August 1992
27 020 Credit Sales invoiced during the month
46 950 Invoices for goods purchases during the month
26 380 Contra (set off) settlements between customers’ and suppliers’
accounts 750 Cash sales during the month
14 150 Cash paid to suppliers for credit transactions
25 260 Cash discounts deducted from payments to
suppliers 590 Provision for doubtful debts 1 August 1992
950 Customers’ balances written off as bad
debts during the month 450 Goods returned to suppliers
620 Credit motes issued to customers
for goods returned 1 220
Cash received from credit customers in full settlement of debts of $42 230 41 630
Cash at bank 31 August 1992 5 100
Debit balances on suppliers’ accounts at 31 August 1992 230
Credit balances on Customers’ accounts at 31 August 1992 120
REQUIRED
a) Using such of the above data as is relevant, prepare a Sales Ledger Control account
and a Purchases (Suppliers) Ledger Control account both for the month of August
1992.
b) Explain the ways in which control accounts can be of use to the management of a
business.
3. M House Private Co Ltd operates an accounting system which includes both Sales and
Purchases Ledger Control Accounts.
The company’s Trial Balance at the year end 30 June 1987 included:
DR CR
$ $
Sales Ledger Control Account 45 200 760
Purchase Ledger Control Account 1 310
48 440 Below are sub-totals relating to the company dealings
with its customers and suppliers during the year ended 30 June 1988.
$ Sales
Gross invoice value
435 620 Net invoice
value (after trade discount) 395 620 Sales returns
179
550 Debts written off (irrecoverable)
1 210 Purchases
Gross invoice value
325 600 Net invoice value (after
trade discount) 271 500 Purchases Returns
Gross invoice
value 16 830 Net
invoice value (after trade discount) 15 340
Amounts payable to Suppliers
Full amount 287 720
Settled in full by payment of 279 180
At 30 June 1988 the Sales Ledger included these accounts with
credit balances. H. Holborn $ 490
K. Cross $1 615
B. Street
$ 885
And the Purchases Ledger included these account with debit balances
$
M. Arch 1 040
C. Latimer 770
At 30 June 1988 the personal account balances of B. Side were
$
Purchase Ledger
4 560 Sales Ledger
3 210 It was decided to set off B. Side’s balance in
the Sales Ledger against his balance in the Purchases Ledger.
REQUIRED
(a) Prepare a Sales Ledger Control Account and a Purchase Ledger Control Account
-both for the year ended 30 June 1988.
(b) Outline the usefulness of control accounts.
4. The following information has been taken from the books of Jo King, for the financial
year ended 31 October 1995.
$
Sales Ledger Balances at 1 November 1994 29 186
Credit sales for year 501
920 Credit sales returns
9 985 Payment received from debtors (all banked)
463 804 Cash Sales
15 242 Debtor’s cheque dishonoured
548 Discount allowed on credit sales
20 417 Bad debts written off
9 420 Debit balances
transferred to purchases ledger accounts 1 043
180
The total of Jo King’s sales ledger balances amounts to $29 098, which does not agree
with closing balance in the sales ledger control account.
1. A debit balance for $2046 had been omitted from the list of debtors;
2. A page of the Sales Day Book with entries totaling $3942 had been mislaid and not
included to total sales: the amounts had been posted to the debtors’ accounts;
3. A sales invoice for $1011 had been completely omitted form the books;
4. A sales ledger account had been overstated by $100;
5. Discount allowed account had been understated by $300;
6. An entry for $806 in the Sales Day Book had not been posted to the debtor’s
account;
7. A debit balance for $702 in the sales ledger had been set off against a contra account
in the purchases ledger; but no entry had been made in the control accounts;
8. A receipt of $620 was debited to the Bank account but omitted from the debtor’s
account;
9. A credit note for $360 sent to a debtor had been entered in the Sales Day Book and
posted as sale to both accounts;
10. A debtor owing $905 was declared bankrupt during October 1995. The debt had
been written off in the control account, but no entry had been made in the debtor’s
account to cancel the debt.
REQUIRED
a) From the original list of balances, draw up the Sales ledger Control Account for the
year ended 31 October 1995 before the errors had been discovered.
b) Take account of the ten errors, and:
(i) show the amendments to be made to the control account and calculate the new
balance on it;
(ii) draw up a statement amending the total of the sales ledger balance to agree
with the new control account balance;
[C] STOCK VALUATION
1. Rosedale Limited commenced trading in one product on 1 January. The purchases and
sales for the past year have been as follows:
Purchases Sales
January 6 000 at $2.00 each
February 4 000 at $2.10 each
March 3 000 at $3.20 each
April 2 000 at $2.15 each
May 5 000 at $3.15 each
June 3 000 at $2.20 each
July 1 600 at $2.50 each
August 4 500 at $3.40 each
September 2 200 at $2.50 each
181
October 3 500 at $3.50 each
November 1 000 at $2.60 each
December 1 800 at $3.60 each
On 1 January, the company raised share capital of $10 000 and five-year loans of
$15,000. During the year all purchases and sales were on cash terms, and expenses of
$16,700 (including loan interest) were also paid in cash.
REQUIRED
2. James Day commenced business on 1 April 1991 as a retailer of the Excel Road master
Caravan Mark II.
During the year ended 31 March 1992, James Day’s dealing in caravans were as follows:
1991
April Brought 6 caravans at $10 000 each.
May Bought 3 caravans at $11 000 each.
June Sold 1 caravan at $16 000 each.
July Sold 3 caravans at $15 500
each. August Bought 2 caravans at
$11 200 each. November Sold 4 caravans at
$16 200 each. 1992
January
Bought 5 caravans at $12 500 each. March
Sold caravans at $15 900 each.
During his first year’s trading, James Day has not taken any money out of the business
for living expenses.
The overhead expenses incurred during the year ended 31 March 1992 have amounted
to $9 000.
REQUIRED
a) Accounting statements showing James Day’s net profit or loss for the year ended 31
March 1992 using each of the following methods of stock valuation.
(i) first in first out;
(ii) last in first out;
b) Explain the advantages and disadvantages of using each of the stock valuation
methods used in (a) above.
182
3. Bethany Sure commenced business on 1 January 1996 with capital of $4000 in cash. She
decided to trade in one product. Her business activities for the first six months of
trading were:
PURCHASES SALES
Units Price ($) Units
Price ($) January 300 4.00 200
6.00 February - -
100 6.50 March 400 4.50
250 7.00 May 250 5.00
250 7.50 June 300
5.00 300 8.00
Assume that when Purchases and Sales are in the same month then Purchases precede
Sales.
REQUIRED
a) Calculate the gross profit for the six months trading assuming that:
(i) stock is valued using F.I.F.O basis;
(ii) stock is valued using the L.I.F.O basis.
b) Assuming that all trading was for cash and that there were no other transactions,
draw up Balance Sheets as at 30 June 1996 with:
(i) stock valued on the FIFO basis;
(ii) stock valued on the LIFO basis.
c) Name two methods of stock valuation other than FIFO and LIFO. Explain briefly the
benefits of the FIFO and LIFO methods of stock valuation and the two ,methods you
have already named.
[D] PARTNERSHIP
1. Apple, Beech and Cherry have been trading for several years and sharing profit on the
basis 2:2:1. They decided to dissolve their partnership on 1 October 1994 because of
bad trading conditions. The balance sheet of the business at 30 September 1994
showed:
183
000 Investments
33 000 Debtors
45 000 Bank
4 000
94 000 Less Current
Liabilities
Creditors 29 000 65 000
147
000 Financed By:
Capital Account Apple 40 000
Beech 30 000
Cherry 40 000
110 000 Current Account Apple
5 000 Beech
6 500 Cherry
7 500 19 000
129 000 Loan
Beech 18 000
147 000
The loan from Beech was repaid, the Plant & Machinery was sold at auction for a net
$41,000 and Apple took over a car (written down value $4,000) for an agreed value of
$5,500. The remaining vehicles were sold for $19,200. Stock realized $10,200 and Debtors
realized $38,700. The creditors of $29,000 were paid off with cheques totaling $28,100 and
the investment realized $37,000. Dissolution expenses incurred were $1,910.
REQUIRED
2. Lau and Wang are partners in a trading business, their partnership agreement provided
as follows:
Lau and Wang agreed to admit Chung to the partnership with effect from 1 July 1987.
The terms under which Chung was admitted were:
184
a) Chung would bring in $80 000 as capital.
b) Goodwill of the firm would be valued at two years’ purchase of the average profits
for the last four complete years. The actual profits were:
1983 $37 500
1984 $40 500
1985 $50 000
1986 $52 000
It was agreed the goodwill account should not
be retained in the books.
c) The three partners’ capitals would be made equal by Lau and Wang either paying in
additional cash or withdrawing cash.
d) No interest would be allowed on capital.
e) Wang’s annual salary would remain at $30 000 and Chung would receive an annual
salary of $25 000.
f) The residue of profits would be divided equally.
The net profit for 1987 was $94 000 and this accrued evenly throughout the year.
REQUIRED
a) The journal entries to record the transactions that occurred when Chung was
admitted as a partner i.e items (a), (b),(c) above.
b) The Profit and Loss Appropriation Account for the year ended 31 December 1987.
c) Explain the nature of goodwill and why it often arises when a change in partnership
takes place.
3. Chia, Kiat and Poh were in partnership sharing profits and losses equally. On 31
December 1985 the credit balances on the partners’ capital account (current accounts
were not kept) were Chia $160,000, Kiat $120,000 and Poh $60,000.
On 1 January 1986, Kiat retired from the partnership. To ascertain the toal amount due
to him goodwill was valued at $30 000 and the fixed assets were valued at $18 000
more than the amount at which they appeared in the books. By agreement no goodwill
account was raised and there was no alteration in the book amounts of the fixed assets.
The total sum due to Kiat was paid to him on 1 July 1986. Chia and Poh continued in
partnership sharing profits equally. The trading profit for the year ended 31 December
1986 was $54 000 and the partners’ drawings during the year were Chia $6 000 and
Poh $17 000.
On 1 July 1987, Yeo was admitted as a partner and from that date onwards profits and
losses were shared in the proportions Chia 2/5, Poh 2/5, Yeo 1/5. Yeo introduced
$40,000 as capital and $12 000 for his share of goodwill and unrecorded appreciation in
the value of fixed assets. No goodwill account was raised and the book value of fixed
assets was not changed, the partners making the appropriate adjusting entries in their
185
capital accounts
The trading profit for 1987 was $65 000 which accrued evenly over the period.
Drawings for the year were Chia $23 000, Poh $33 000 and Yeo $5 000.
On 2 January 1988 the partnership was dissolved and the net assets were sold for
$320,000 cash. On the same day the partners’ accounts were closed and they withdrew
the sums due to them.
REQUIRED
Partners’ Capital accounts for the period from 31 December 1985 to 2 January 1988
showing clearly the balances carried down on 31 December in each year.
1. The following financial information was available from the books of The Triangle
Flower Club as at 1 July 1988.
$
Balance at Bank 12 200
Club Premises 120 000
Members’ Subscriptions due 1
250 Creditors -bar supplies
1 100 - flower and bulb supplies
3 700 Stock of flowers and bulbs
10 100 Greenhouses
27 000 Vehicles
21 500 Stock
-bar 5 400
186
Sundry Expenses 750
Flowers and bulbs 14 200
Bar Supplies 32 300
Additional information
5. Sundry expenses include an insurance account which was prepaid by $50 as at 30 June
1989.
REQUIRED
2. The treasurer of the Accountants Social Centre has prepared the following statements
for the year ended 31 October 1992.
Receipts $ Payments
$ Balance – Cash 250 Bar Staff – Wages
13 950 - Bank 7 500 Insurance
1 410 Members’ Subscriptions General
Expenses 1 060 - Annual 4 450 Dinner
Dance – Expenses 980 - Life 600
Furniture 2 400 Dinner Dance – Sales 1 150
Bar Purchases 21 550 Bar Takings
47 890 Clubhouse – Rent 4 840
Maintenance 3 620
Building Society Investment 5 500
Secretary - honorarium 750
Balance - Cash 170
187
- Bank
5 610 $61 840
$61 840
Additional information
(ii) A new scheme for life membership was introduced on 1 November 1991. The scheme
involves new members who may elect to pay $100 for life membership. The
membership committee has decided that any such income should be capitalized and
transferred to revenue over a 5 year period by equal installments.
REQUIRED
a) Prepare a bar revenue account for the year ended 31 October 1992.
b) Prepare the club’s income and expenditure account for the year ended 31 October
1992.
c) Prepare the club’s balance sheet as at 31 October 1992.
3. The treasurer of the Selectar Social Club has prepared the following receipts and
payments account for the year ended 30 June 1994:
$ $
Balance at 1 July 1993 9 300 Bar purchases
18 400 Subscriptions 18 200 Disco expenses
5 500 Bar receipts 27 400 Wages
8 000 Disco receipts 8 800 Rates
4 200 Sale of fixtures 1 100
General expenses 12 400
Purchase of fixtures 3 500
188
Balance at 30 June 1994 12 800
64 800 64 800
Incompetence, faulty procedures and changes in bar staff have led to stock losses, the
amount of which is not known. The club committee members are confident, however,
that the profit margin on sales has been maintained at the usual level of 30%.
REQUIRED
a) A Bar trading account for the year ended 30 June 1994, showing clearly the profit
on bar sales.
b) An income and expenditure account for the year ended 30 June 1994.
c) A Balance Sheet as at 30 June 1994.
d) A calculation of the Value at Cost of the bar stock losses.
1. There has been a robbery at the shop of Mrs Patricia Large. All the stock and the cash
till float of $150 cash have been stolen. You are asked to help prepare accounts for
insurance claim purposes. You determine the following information.
(i) Bank Statements for the nine months to 30th September 1992 show:
RECEIPTS $
Debtors – Cash & Cheques banked 49 650
Private Investment Income 1 810
PAYMENTS $
Rent 1 900
Electricity 560
Insurance – Business
140 - Private
189
160 Telephone
260 Creditors
37 850
(v) Rates for the period 1st April 1992 to 31st October 1992 amount to $900 and have not
yet been paid.
(vi)Trade debtors and trade creditors amounted to $270 and $2 050 respectively on 30 th
September 1992.
(vii) The gross profit margin has been consistent at 20% in recent years.
REQUIRED
a) A trading and profit and loss account for the nine months to 30 th September 1992.
b) A balance sheet as at 30th September 1992 showing clearly the INSURANCE CLAIM
FIGURE.
2. Ann Teak began to trade as a furniture dealer on 1 August 1989 but she kept no books
or proper records of her business transactions. She now wishes to obtain a bank loan
and needs to provide the bank with details of her business assets and income for the
three years ended 31 July 1992.
The following data has been obtained and verified from different sources.
At 1 August At 31 July At 31 July At 31 July
190
1989 1990 1991
1992 $ $ $
$ Bank current account 12 680 18 130 11 475
22 560 Stocks 29 000 43 400 41 000
52 800 Debtors 26 300 31 700 39 900
41 400 Creditors 12 200 15 700 18 100
27 300 All deposits into the bank current account were from business
transactions except for a gift from aunt of $9 000 which was paid in on 1 December
1990. On 1 August 1989 Ann had a vehicle valued at $28 000. This was sold in
September 1991 for $13 500 and replaced be a new vehicle costing $52 000 which she
still owns. Both vehicles were used in the business.
In January 1990 Ann opened a business deposit
account at the bank paying in $4 000. She transferred $1 500 back to her current
account on 15 April 1992. Interest was credited to but not withdrawn from the deposit
account as follows:
$ June 1990
250 June 1991
390 June
1992 320 Ann regularly
holds large amounts of cash in connection with her dealing activities and recalls that on
1 August 1989 she had $22 000. At 31 July 1992 she was holding $35 800 and she
estimates that the cash increase occurred evenly over the three year period.
She estimates that during the three year period she used business funds to pay the
following:
Years ended
31 July 1990 31 July 1991 31 July 1992
$ $
$ Personal living expenses 15 700 18 900 22
400 Rent of private flat 10 000 12 000 15
000 Holidays - 8 600 9
900 Business expenses 76 000 85 000 102
000
She also recalls that hen her son married in November 1990 she gave him from her
stock furniture which had cost $15 500.
REQUIRED
a) Prepare Statements to show the capital position of her business at 1 August 1989
and at 31 July in each of the following three years.
b) Calculate (so far as the information allows) her trading profits for each of the three
years ended 31 July 1992.
191
3. Leong Boon Kiat has not kept detailed accounts, other than the following summarized
record of the bank transactions for the year ended 30 September 1987:
Bank Account
$ $
Balance b/d 19 500 Trade creditors 122 450
Takings (Note1) 152 000 Rates 5 100
Loan proceeds 15 000 Loan interest 750
(Note 2) Purchase of Lease (Note 3) 20
000 Equipment
5 000 Balance c/d
33 200 186 500
186 500
Notes
1) The takings banked were after using $2 450 for buying goods for resale and $8 000
for personal drawings.
2) The loan was raised on 1 October 1986 with interest agreed at 10% per annum.
3) The lease is for a period of twenty years from 1 April 1987.
During the year, Leong’s premises were burgled and a week’s takings were stolen from the
safe, although Leong does not know the amount. The money has not been recovered and it
was not insured. Leong achieves a gross profit of 25% on his sales.
Additional information
REQUIRED
a) A Trading and profit and loss account for the year ended 30 September 1987,
including therein your calculation of the cash stolen.
b) A Balance Sheet as at 30 September 1987.
192
4. On 1 April 1989, L Patel purchased a retail business from J Bosu at a cost of $25 000
which was paid in cash, the asset acquired by L Patel were as follows:
Fixture and Fittings valued at $7 800
Stock valued at $15 000
Immediately upon acquiring the business, L Patel opened a business
bank account the following is a summary of the transactions in this account during the
year ended 31 March 1990.
$
$ Opening deposit 1 710 Purchases
39 300 Receipts: Credit sales 39 180
Establishment & Cash sales 9 300
administrative distribution 2 400 Legacy J Patel deceased
11 000 Marketing and distribution
expenses 5 300 Closing
balance 3 810 Purchases of Fixtures 10 000
Drawings 8 000
$65 000 $65 000
Additional information:
(i) L Patel’s turnover for the year ended 31 March 1990 amounted to $56 100.
(ii) During the year ended 31 March 1990, the stock turnover rate has been three.
(iii)L Patel has withdrawn from the business, for his own use, goods costing $2 000
during the year ended 31 March 1990.
(iv)Creditors for purchases at 31 March 1990 amounted to $9 370 whilst accrued
charges for establishment and administrative expenses were $250 at that date.
(v) Depreciation on fixtures for the year ended 31 March 1990 is to be provided at the
rate of 10% of the cost of fixtures held at that date.
REQUIRED
a) L Patel’s trading and profit and loss account for the year ended 31 March 1990 and a
balance sheet as at that date.
5. Brown, a sole trader does not keep proper books of accounts. He produced the
following financial information on his business at:
193
$ $ $
Freehold Premises at cost 50 000 50 000
50 000 Fixtures and Fittings 10 000 9 000
11 000 Motor Vans 8 000
6 000 4 000 Trade Debtors 28 500
26 000 31 800 Trade Creditors
16 000 19 000 18 500 Accrued expenses
2 500 3 100 2 800 Stock (at cost)
41 000 38 000 56 000 Balance at
Bank 12 500 13 000 - Cash
3 500 3 800 6 400
Expenses in advance - - 24 000
Brown had been asked to produce estimates of his net-profit for 1997 and 1998. After
discussions with his accountant, Brown produced the following additional information:
(1) Private expenditure had been incurred out of business’s resources as follows:
(2) It is estimated that $4 200 of the debtors as at 31 Dec 1998 are irrecoverable.
(3) The freehold premises had been extensively modernized at a cost of $55 000 in 1998.
Brown had paid cash on account of $30 000, but the balance was still owing and was not
included as part of the trade creditors as at 31 December 1998. No depreciation is
provided on freehold premises.
(4) In 1997, a fire in part of the premises destroyed stock (cost $10 800). An insurance
claim of $7 000 had been agreed on 1 Dec. 1997, but no money had been paid to Brown
by 31 December 1998. This item was not included in any of the closing debtors figures.
(5) From 1 January 1998 Brown took from his Cash Sales takings and paid it into his own
bank account.
(6) Brown agreed that the valuation figures for the Motor Vans as at 31 December were
probably inaccurate. He advised the accountant that the following transactions had
occurred:
i. On 1 January 1996 two Motor Vans had been purchased at a total cost of $20 000.
ii. On 1 March 1997 one of the vans (cost $10 000) was sold for $6 000. The proceeds
were paid into the business bank account.
194
The accountant advised that depreciation should be provided on the Vans at 20%
per annum on cost.
(7) No additional capital had been introduced during the period 1 January 1996 to 31
December 1998.
REQUIRED
Calculate Brown’s profit for the years ended 31 December 1997 and 1998.
1. The following account balances have been extracted form the books of Circus and Green
who for many years have operated a business manufacturing bathroom cabinets.
$
Land and Buildings (cost $152 000) 88 000
Plant & Machinery (cost $93 000) 62 000
Motor Vehicles (cost $17 500) 12 500
Stocks - Raw Materials 21 600
- Work In Progress
25 800 - Finished Goods
24 000 Capital A/C - Circus
160 000 - Green
80 000 Current A/C - Circus
12 000 CR -
Green 2 500 DR
$
Creditors 51 700
Debtors 74 900
Factory Wages 141 000
Factory Expenses 10 200
Bank overdraft 11 300
Administrative Expenses
31 300 Selling Expenses
22 300 Discounts Allowed
1 700 Bad debts written off
4 500 Sales
521 000 Purchases of
raw materials 197 000
It is the business policy to transfer the value of fully completed bathroom cabinets to
the Trading Account at factory cost plus a 20% mark up.
(c) The partnership agreement provides for interest on partners’ capital at 10% per
annum, for the award of a partnership salary of $12 000 per annum to Green and for the
balance of profits or losses to be shared between the partners in the proportion Circus
3: Green 1.
REQUIRED
a) Prepare Manufacturing Account for the year ended 31 May 1988 showing clearly
prime cost and the cost of goods manufactured.
b) Prepare Trading and Profit and Loss Account and a Profit and Loss Appropriation
Account for the year ended 31 May 1988.
c) Prepare an EXTRACT from the Balance Sheet as at 31 May 1988 showing the
partners’ Capital Current Accounts in full details.
2. The Veneer Joinery Company Limited is concerned solely with the manufacture and sale
of the Silverglide Mark II kitchen unit.
196
During the year ended 31 March 1990, the company manufactured 105 units at a
wholesale value of $1 000 per unit.
The following list of balances as at 31 March 1990 have been extracted from the books
of the company:
$
Raw materials: stock at 1 April 1989
2 000 purchases
29 000 Direct labour
21 000 Factory overheads: fixed
14 000 variable
19 075 Balance at bank
7 300 Sales (93 units)
210 000 Debtors
9 000 Creditors
6 980
Finished goods stock at 1 April 1989 (17 units @ $1 000 each) 17 000
Provision for unrealized profit on goods manufactured 2
550 Showroom rent, heating, lighting and cleaning
14 700 Marketing expenses
43 600 Freehold buildings: at cost
30 000 provision for depreciation
at 1 April 1989 8 250 Plant and machinery: at cost
96 000 provision for
depreciation at 1 April 1989 28 800 Showroom fixtures and
fittings: at cost 57 600
provision for depreciation
at 1 April 1989 11 520
Retained earnings at 1 April 1989 12 175
Ordinary share capital: Ordinary shares of $1 fully paid 80 000
Additional information
i. Units manufactured are transferred from the manufacturing account to the trading
account at wholesale value; there was no work in progress at either 1 April 1989 or
31 March 1990.
ii. It is company policy for depreciation to be provided on the cost of fixed assets held
at each accounting year end at the following percentages:
Freehold buildings 2.5%
Plant & Machinery 10%
Showroom fixtures &fittings 5%
The freehold buildings depreciation is apportioned two
thirds to the factory and one third to the showroom.
iii. Raw materials stocks at 31 March 1990 have been valued at $3 300.
iv. The company’s board is recommending that a dividend of $0.25 per share be paid on
the ordinary share capital.
197
v. The company is currently considering the future of its factory bearing in mind that it
is now possible to sub-contract the manufacture of the Silveridge Mark II kitchen
units to the Household Manufacturing Company Limited at a unit cost of $850.
REQUIRED
a) A manufacturing, trading and profit and loss account for the year ended 31 March
1990.
b) A Balance Sheet as at 31 March 1990.
c) A reasoned report addressed to the directors of the Veneer Joinery Company
Limited advising them whether or not to contribute their manufacturing work.
3. The following list of balances as at 31 March 1995has been extracted from the books of
Kitchen Tables Limited, a small manufacturing company:
198
Additional information
REQUIRED
a) A Manufacturing, Trading and Profit and Loss Account for the year ended 31 March
1995.
b) A Balance Sheet as at 31 March 1995.
4. The following trial balance has been prepared from the books of the Ace Manufacturing
Co. Ltd as at 30 June 1993.
DR CR
$ $
Debtors and Creditors 75 500
62 200 Purchases of Raw materials 310 400
Provision for unrealized profit
4 900 10% Debentures (1999)
120 000 Debenture Interest
6 000 Share Capital
(2 000 000
ordinary shares of $0.1 each) 200 000 Retained
Profit 95 700 Stocks
at 1 July 1992
Raw materials 35 900
Work in Progress 12 600
Finished Goods 49 000
Rent Factory 35 000
Office 25 000
Maintenance Factory
12 100 Office
9 700 Heat, Power etc Factory
21 300 Office
8 800 Insurance
199
Factory 2 100
Office 700
Notes:
200
vi. Provide for - unrealized profit on stock of finished goods at 30 June 1993
- 20% dividend for ordinary sharesholders
- possible bad debts; estimated ay 2% of book debts.
REQUIRED
a) A manufacturing Account for the year ended 30 June 1993 showing clearly prime
cost and cost of goods manufactured.
b) A Trading and profit and Loss and Appropriation Account for the year ended 30
June 1993.
c) A Balance Sheet as at 30 June 1993.
1. The annual accounts of the Idealist PLC are set out below in summary form.
Fixed Assets
Cost Depn. Net Value
$000 $000 $000
$000 Land & Buildings 4 000 1 200 2 800 Share
Capital(Ord. $0.1 shares) 2 100 Plant & Machinery 2 000 200 1
800 8% Preference Shares 250 Motor Vehicles 400 100
300 Profit $ Loss Balance 130
4 900 2 480
10% Debenture 1994/6 3 000 Current Assets
Current Liabilities Stock
430 Trade Creditors 1 300
Debtors 1 900 Bank 600 1 900
Cash 150 2 480
$7 380
$7 380
Trading and Profit and Loss Account for the year ended 31 August 1990
$000 $000
Sales 1 240
Less Cost of Sales 770
Gross Profit 470
Less Expenses
125 Net Profit before taxation
345 Less Taxation
115 Net Profit after taxation
230 Add balance from previous
year 340
570 Less
Dividends
201
Preference Shares 8% 20
Ordinary Shares 20% 420 440
Balance $130
Note: Figures for assets and liabilities relate to the balance sheet figures at the end of the
year. You may assume that there are 360 days in the year.
202
REQUIRED
a) Identify (giving at least two reasons) which company is the electrical manufacturer
and which is the food retailer.
b) Prepare, so far as the information allows, profit and loss accounts and balance
sheets for both companies for the past year.
c) What is meant by liquidity? Which company would you regard as the more likely to
have liquidity problems? Why?
3. J. Peters is considering purchasing the total share capital of a small trading company,
Kings Lyne Limited.
The company’s accountants have supplied the following information concerning Kings
Lyne limited:
Trading and Profit and Loss Accounts
Years ended 31 March 1995
1996 $000 $000
$000 $000 Sales 240
360 Less Cost of Sales
160 270 Gross profit
80 90 Less Overheads
Variable
36 54 Fixed
24 60 22 76 Net Profit
20 14
Balance Sheets
As at 31 March 1995
1996 $000
$000 Fixed Assets 50
90 Current Assets
Stock
48 20 Debtors
33 50 Bank
40 29
121 99 Current Liabilities
Creditors 21 25
Share Capital
Ordinary Shares of $1 100
100 Retained Earnings 50
203
64 150
164
In the absence of the company’s final accounts, the following accounting ratios and
related information for the year ended 1 March 1997 have been produced:
Sales $440 000
Gross Profit 25%
Sales
Variable Overheads
15% Sales
Net Profit
5% Sales
Stock Turnover 15
(using the average of opening and closing stocks)
Returned on Capital Employed 11%
(using Fixed assets plus Working Capital at 31 March 1997)
Acid test ratio 4:1
REQUIRED
a) Prepare the Trading and Profit and Loss Account for the year ended 31 March 1997
and a balance sheet as at that date in as much relevant detail as possible.
b) Identify four areas of weakness in the company’s performance.
204
9. Collection period for debtors = 40 days
All sales are on a credit basis.
10. Payment period for creditors = 17 days.
All purchases are on credit basis.
11. Net current assets at 30 September 1997 consists of:
Stock
Debtors
Bank (balance in hand)
Creditors
12. Cash drawings for the year of $9 370.
REQUIRED
a) Prepare a Trading and Profit and Loss Account for the year ended 30 September
1997 and a Balance Sheet as at that date in as much details as possible.
b) M Porter had planned for the payment period for creditors at 30 September 1997 to
be 30 days (not 17 days as stated above).
Prepare M Porter’s Balance Sheet as at 30 September 1997 after allowing for a payment
period for creditors of 30 days.
5. Holly and Ivy are partners in business. The summarized final accounts for the financial
years 1992 and 1993 are set out below:
1992 1993
$000 $000 $000
$000 SALES 1 500
1 250 less Cost of Sales
Opening Stock 300
600 Purchases 1 000
400 1 300
1 000 less Closing Stock 600
700 400 600 Gross Profit
800 650 less
Salaries
220 200
Depreciation 150 120
Interest 100 150
Expenses 210 680 170
640 $120
$10
205
Current A/C - Holly 50 100 Stock
600 400 - Ivy 100 (50)
Bank Loan 1 200 1 200
Debtor 310 420 Creditor 250
100 Bank
60 - Bank - 380
1 860 1 950 1 860 1 950
REQUIRED
a) Explain why the firm Holly and Ivy will wish to compare the 1992 results with the
1993 results. What problems might arise in comparing one year with another within
the same firm?
b) Calculate the following ratios for both 1992 and 1993.
i. Gross Profit percentage
ii. Net Profit percentage
iii. ROCE (Return on Capital Employed)
iv. Current Ratio
v. Liquid Ratio (acid test)
vi. Stockturn
vii. Debtors ratio (assume 300 days per year)
viii. Creditors ratio (assume 300 days per year)
(c) What conclusions do you draw from the ratios calculated for:
(i) part (b) (iii) R.O.C.E
(ii) part (b) (vi) Stockturn?
$ $ $ $
Capital 42 000 Fixed Assets Cost
Depn Net Profit for year 15 500 Premises 47 000
- 47 000 57 500 Equipment 15 000
9 000 6 000 Less Drawings 12 000
45 500 Current Assets
Current Liabilities Stock
5 100 Creditors 4 700 Debtors
3 800 Bank 11 509 Cash
200 9 100 61 709
62 100
206
It does NOT balance. He checks through his records and finds these mistakes.
1. The debit balance of $717 on F. Trueman’s account has been carries down as $747
and included in the final accounts at the latter figure.
2. A cheque for $1 260 for the purchase of new equipment had been entered correctly
in the Cash Account but had been posted to the asset account as $1 200.
3. Bank charges of $185 appeared in the Cash Book but had not been posted to the
ledger.
4. A credit note from B. Statham Ltd for $600 had been correctly entered in the
Returns Out Book but had been posted to B. Statham Ltd as $666.
5. An invoice for $1 390 for goods sold to C. Washbbrook had been correctly entered in
the Sales day book but had been posted to C. Washbrook as $1 930.
REQUIRED
a) A Suspense Account showing the original entry and the correcting entries.
b) A Statement showing the revised profit for the year.
c) A Corrected Balance Sheet
2. When Carrie Card prepared her trial balance she found that it did not agree. She opened
a suspense account for the difference. She then prepared a trading and profit and loss
account and the following balance sheet:
$ $ $ $
Capital 153 500 Fixed Assets Cost Depn Net
Profit 20 700 Premises 110 000 - 110
000 174 200 Equipment 32 000 11
000 21 000 less Drawings 23 100 Van 14 000
6 000 8 000 151 000
139 000
207
1. M. Torme paid on 30 August 1993 the $700 which he has owed the business since
May 1992. The full amount of the debt had been included as a specific provision for
bad debts. His personal account has now been credited but no further entry made in
the books.
2. A credit note from A. Supplier for $210 has been posted to the credit of his account.
3. A sales day book sub total of $17 200 has been incorrectly carried forward as $12
700.
4. Equipment purchased for $2 250 has been wrongly charged to maintenance
expenses.
5. A balance of $80 on a creditor account was omitted from the creditors schedule
which was taken to the trial balance.
6. An invoice for $350 – repairs to Delivery Van – dated June 1993 had been found in
the post room. It had not been dealt with in any account.
7. A sales invoice for $4 710 has been correctly entered in the Sales Day Book but it
had been posted to B. Green’s personal account as $3 710.
REQUIRED
a) A Suspense Account
b) An amended Profit Statement
c) A corrected Balance Sheet as at 31 August 1993 showing clearly any alterations to
the Draft Balance Sheet.
3. Doris Gower has prepared the following trial balance as at 30 September 1995 for the
business Bats & Co.
DR CR
$ $
Purchases 97 000
Sales
107 150 Stock 1 October 1994
22 500 Carriage Outward
3 140 Sundry Expenses
7 420 Provision for Doubtful
Debts 1 420 Bad Debts
900 Returns
Inwards 1 100
Returns Outwards 2 250
Provision for Depreciation -Fixture & Fittings 5 200
- Motor Vehicles 4 800
Wages 24 300
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Discount allowed
2 450 Discount received
1 270 Debtors
32 750 Creditors
21 250 Premises
46 500 Fixtures & Fittings
28 700 Motor
Vehicles 10 200 Bank
Overdraft 11 100 Cash
3 150
Carriage Inwards 1 370
Capital 125 000
Suspense 80
940 320 930
320 930
Her brother Daniel Gower says, ‘ I play Cricket. I am not and accountant but I believe
that my sister has entered some of the accounts on the wrong side. Will you please
check this trial balance’.
He also tells you that a friend of his has checked the books and found the following
errors.
1) A stock totaling $3 400 had been missed from the stock total at 30 September
1994.
2) Repairs to motor vehicle cost $1 750 had been debited in error to Motor
Vehicles Account at $1 570.
3) A credit balance of $760 in the Sales Ledger had been extracted as a debit
balance.
4) An invoice for the purchase of goods from F. Trueman had been entirely omitted
from the books. The invoice totaled $710.
5) An invoice for the sale on credit to Smith of goods with a selling price of $700,
has been debited to Smith’s account but not entered in the Sales Day Book.
REQUIRED
a) Re-write the trial balance correctly entering the difference as a Suspense Account
balance.
b) Prepare Journal entries to correct the five errors shown above.
c) Write up the Suspense Account starting with the balance from your trial balance.
[J] BUDGETING
1. Peter Green is making plans for his business for the three months ending 30 September
1988 and, as a result, has prepared the following estimated trading and profit and loss
account for that period.
$ $
Sales 130 000
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Less: Cost of Sales 100
000 Gross Profit
30 000 Less Wages 2 900
Administration expenses
3 600 Deopreciation- Motor
Vehicle 500
7 000 Net Profit
23 000
REQUIRED
a) A cash budget for the three months ending 30 September 1988, on a month by
month basis.
b) Explain why it is important to distinguish revenue expenditure and capital
expenditure.
2. Nafferton Limited manufactures a single product, the cost structure of which (per unit)
is as follows:
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$ $
Selling price 50
Direct material 10
Direct labour 15
Direct production expenses 3
Direct selling expenses 4
Variable cost per unit
32 Contribution
18
The company’s plans for the next eight months are as follows:
$
Stock of raw materials at cost 18 000
Stock of finished goods at marginal cost 56 000
Bank balance (debit) 10 000
Creditors for materials
18 000 Creditors for production expenses
6 000 Creditors for selling expenses
8 800 Debtors
74 000 (of which $52 000 is due to
be received in Month 1 and $22 000 in Month 2)
REQUIRED
a) A cash budget for the company for the first six months showing the balance of cash
at the end of each month.
b) A detailed Profit statement for the first six months.
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[K] OVERHEADS
1. Krupp Industries PLC operates a factory with four Departments. Two of the
Departments – the Machine Shop and the Assembly Shop – are production departments,
whereas Maintenance Department and the Power House provide a service. For the
coming year the budgeted costs are as follows:
Number of employees 20 40 10 5
Areas (sq metres) 1 500 2 500 500 100
Plant valuation ($000s) 6 500 2 500 1 200 800
Direct labour hours 1 600 2 400
Machine hours 5 540 1 160
Maintenance hours 900 300
Units of power used 2 100 600 300
REQUIRED
a) ANALYSE the above indirect costs between the four departments showing the bases
of apportionment you have used.
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b) Re-apportion the costs of service department over the two Production departments
using appropriate bases.
c) Calculate an overhead absorption rate for the Machine Shop based on machine
hours and overhead absorption rate for the Assembly Shop based on direct labour
hours.
d) Explain the meaning of the terms:
i) overhead absorption
ii) overhead under-absorption
iii) overhead over-absorption
Illustrate your answer by reference to the Machine Shop.
2. Box & Cox Ltd have three production departments – Moulding, Assembly and Finishing
– and two service departments – personnel and Maintenance. The following figures are
required to calculate overhead recovery rates:
Personnel costs are split amongst all the other departments on the basis of number of
employees. Maintenance costs are split amongst the three production departments on the
basis of floor area.
Moulding and Assembly department overhead rates are applied on a machine hour
basis. Finishing department overhead rates are applied on a direct labour hour basis.
REQUIRED
a) CALCULATE overhead recovery rates for each of the three production departments.
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Direct Materials Direct Labour Hours Rate per Direct Direct Machine
Labour Hour
Hours Moulding dept $315 40 $5.00 50
Assembly dept $52 8 $4.00 12
Finishing dept $20 2 $4.00 3
REQUIRED
1. James Joyce Ltd has $1 000 000 to invest in a project. He was to make a choice between
two projects, and has been given the following information about them:
Project A Project B
$000 $000
Cost of capital is estimated at 12% and both projects are expected to have residual
value of zero at the end of the five year period.
Further information is available in the form of Discount factor tables giving the Net
Present value of $1.
Joyce’s book-keeper has advised that Project B be accepted, as it has the fastest payback.
REQUIRED
2. Given below are details of two capital expenditure projects which the Board of
Developing Limited has under consideration. Both of the projects have an initial cost of
$500 000, but because of shortage of funds, only one of the projects can be undertaken.
Project 62 Project 63
$ $
expected profit Year 1 160 000 70 000
2 150 000 90
000 3 80 000
120 000 4 60 000
120 000 5 40
000 110 000 Estimated value of proceeds of sale
of equipment at end of year
5 50 000 50 000
Notes
1. Profits (as given above) have been calculated after deducting straight line
depreciation calculated over five years.
2. The company’s costs of capital is 12%. The relevant discount table is shown
below:
End of Year 1 0.893
2 0.797
3 0.712
4 0.636
5 0.567
REQUIRED
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c) State two ways in which risk may be taken into account when considering capital
expenditure decisions.
1. Cornucopia Limited manufactures a single product and has prepared the following data
for the years ended 30 September 1990 and 1991.
$
Selling price per unit 15.00
Variable cost per unit
direct materials 4.00
direct labour 5.00
overhead expense 1.00
10.00
5.00
Fixed production overhead (budgeted and incurred) $450 000 per annum
Normal activity level 150 000 units per
annum Fixed selling and administrative expenses $180 000 per
annum
You may assume that there were no variations from the standard variable cost and that
any production volume variance is written off directly at the year end as a cost of goods
sold adjustment.
REQUIRED
a) Prepare Income statements for the year ended 30 September 1990 and 1991 using
firstly, the variable (or marginal) costing method and secondly, the absorption
costing method.
b) Give figures to reconcile the difference in operating income for both years.
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c) Indicate briefly the arguments in favour of each of these methods of costing.
2. Naferton Limited manufactures a single product, the variable cost structure of which
has not changed for several years and is as follows:
$ $
Selling price per unit 20.00
Variable cost per unit
Direct materials 3.00
Direct labour 8.00
Direct production expenses 3.00
Direct selling expenses
1.00 15.00
5.00
Unit production and sales for the past two years have been:
You may assume that fixed costs have remained constant for several years and that any
production volume variance is adjusted at the year end against the cost of goods sold.
REQUIRED
a) Prepare profit and loss statements for the year ended 30 April 1993 using firstly the
variable (or marginal0 costing method and secondly, the absorption costing method
to value stocks
b) Give figures to reconcile the differences in operating income for both years between
the two methods.
c) Indicate briefly the arguments in favour of each of these methods of costing.
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