Ce Principles Of Accounts 2000 Paper

HCKEE-PRINCIPLES OF ACCOUNTS-2000

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SECTION A Answer any FOUR questions from this section. Each question carries 10 marks. 1. For each of the independent situations described below, list the accounting principle or concept that has been violated and give your explanation. (10 marks) i.

Raymond Company has been adopting different methods to calculate depreciation on its motor vehicles for the past 4 years.

ii.

In estimating the provision for doubtful debts, the accountant of Peter Limited prefers to have a provision that is slightly too small rather than slightly too large.

iii.

The current liabilities of Reliable Store are much bigger than its current assets. In order to present a better liquidity position, the owner decides to include his personal bank account in the Store’s balance sheet.

iv.

Luxury Hotel recognises hotel room rental income on the date that a reservation is received. For the year 2001, many overseas visitors make reservations one year in advance.

2. “Although the totals of debit and credit balances agree in a trial balance, it does not mean that the books are correct as there are various situations that give rise to errors.” Elaborate on the above statement with examples. (10 marks) 3. Mandy Limited has an authorised share capital consisting of 500000 ordinary shares of $2.50 each and 50000 8% preference shares of $10 each. An extract of the share capital and reserves section of its balance sheet at 31 December 1999 is shown below: $ Issued and fully paid share capital 19000 8% preference shares

$

?

? Ordinary shares

1000000 ?

Reserves Share premium

600000

Retained profits

720800

1320800 ?

Additional information: i.

The shares were all issued on 1 January 1997 and the preference shares were issued at par.

ii.

There were no other transactions affecting the share capital and share premium accounts after the first issue.

iii.

The balance in retained profits at 1 January 1999 was $590000 and there were no dividends in arrears. Net profit for the year was $250000.

Required to calculate: a. the amount of authorised share capital. (1.5 marks)

HCKEE-PRINCIPLES OF ACCOUNTS-2000

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b. the amount of paid-up preference share capital. (1 mark) c. the amount of issued share capital. (1 mark) d. the number of ordinary shares issued. (1.5 marks) e. the amount of dividend that should be paid annually to preference shareholders. (1 mark) f.

the average issue price of an ordinary share. (2 marks)

g. the amount of ordinary dividend declared during the year 1999. (2 marks) 4. On 1 July 1999, Queen Limited, which prepares its accounts annually to 31 December, paid a deposit of $2400 to Prince Limited to acquire a piece of equipment on hire purchase terms. The cash price of the equipment was $31200. Queen Limited was required to pay, in addition to the deposit, eight equal quarterly instalments of $4464 each, payable on the last days of March, June, September and December. The instalments were calculated taking into account interest at the rate of 12% per annum on the balance of the cash price outstanding on 1 July 1999. The first instalment was paid on 30 September 1999. On 31 December 1999, after paying the December instalment and the outstanding cash price balance, the company sold the equipment for $30000 cash. Depreciation is to be charged on the equipment at the rate of 10% per annum on cost. Queen Limited adopted the interest suspense account method in recording the hire purchase transactions. Required: Prepare the following accounts in the books of Queen Limited to record the above transactions: a. Prince Limited account. (4 marks) b. interest suspense account. (3 marks) c. disposal of equipment account. (3 marks) 5. Ben Lee is a wholesaler of carpets. On 1 January 2000, he had the following balances in his books: Trade debtors

$ 42000

Bank

69300

Stock

84600

Trade creditors

79110

All purchases and sales were made on credit. During the three months to 31 March 2000, Ben made a gross profit of 25% on all sales. The business banked all receipts from debtors amounting to $995000 and paid the following out of the business bank account: $ Operating expenses 160400 Trade creditors

?

On 31 March 2000, there was a burglary in the shop and all the stock was stolen. It was also discovered that the cashier had misappropriated cash from the business bank account

HCKEE-PRINCIPLES OF ACCOUNTS-2000

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amounting to $10000. In order to ascertain the amount of the stock loss, Ben identified the following balances on the same day: Trade debtors

$ 73500

Bank

55650

Trade creditors

88900

Required: a. Calculate the amount of sales for the three months to 31 March 2000. (2 marks) b. Draw up the bank account for the period. (3 marks) c. Calculate the amount of stock stolen. (5 marks) 6. Kenny made the following transactions: 1999 October 1 Drew a one-month bill on Chan for $4650 to settle a debt of $4690 owed from him. 15 Drew a four-month bill on Lung for $7200. 20 Endorsed Chan’s bill of $4650 over to Au in part settlement of the amount owed to him. Kenny also sent a cheque of $3350 to Au for the balance. November 1 Chan’s bill was dishonoured. Kenny paid to Au the full amount of the bill by cheque. 2 Chan paid $1650 by cheque and accepted a second bill for the remaining balance plus interest at 6% per annum payable in two months. December 15 Discounted the bill of $7200 from Lung t 8% per annum with the bank. 2000 January 2 Chan’s bill was honoured. February 15 Lung’s bill was dishonoured and Kenny paid to the bank the amount of the bill plus a noting charge of $200. 22 Lung settled the outstanding amount by cheque. Required: Prepare journal entries in Kenny’s books to record the above transactions. (Narrations are not required.) (10 marks) SECTION B Answer any THREE questions from this section. Each question carries 20 marks. 7. The profit and loss account of Sunny Fashion for the year ended 31 December 1999 is shown below:

$

$

$

HCKEE-PRINCIPLES OF ACCOUNTS-2000 Sales

ALL RIGHTS RESERVED 1125000

Less: Sales returns

45000 1080000

Cost of goods sold Opening stock

?

Purchases

?

Less: Purchases returns

28000

? ?

Less: Closing stock

?

Gross profit

648000 432000

Less: Rent and rates

185500

Salaries

120000

Selling expenses

18000

Depreciation of fixed assets

6500

Sundry expenses

6000

336000

Net profit

96000

Additional information: i.

The closing stock and the opening stock amounted to the same figure.

ii.

The stock turnover rate was 8 times.

iii.

Debtors’ collection period for the year was two months and creditors’ repayment period was three months.

iv.

Sales and purchases accrued evenly throughout the year.

v.

All purchases and 90% of the net sales were on credit.

vi.

The current ratio was 2:1:1.

vii.

Current assets consisted of cash at bank, debtors, stock and prepayments.

viii.

Cash at bank amounted to 40% of working capital.

ix.

The fixed assets had a cost of $339800 and a provision for depreciation of $191500 at 1 January 1999. There were no additions and disposals of fixed assets during the year.

x.

The return based on the owner’s capital at 31 December 1999 was 30%.

xi.

Drawings during the year amounted to $36000.

Required: a. Calculate the amounts for closing stock and gross purchases. (4 marks) b. Prepare the balance sheet of Sunny Fashion as at 31 December 1999. (12 marks) c. Briefly comment on the liquidity and profitability of Sunny Fashion for 1999 if the company had the following figures in 1998: Current ratio Stock turnover rate Debtors’ collection period Return on owner’s capital

1:6:1 9 times 2.5 months 45% (4 marks)

8. The following trial balance was extracted from the books of Moon Limited at 31 March 2000:

HCKEE-PRINCIPLES OF ACCOUNTS-2000 1200000 ordinary shares of $0.50 each, fully paid

ALL RIGHTS RESERVED $ $ 600000

Furniture and fittings, at cost

1500000

Motor vehicles, at cost

500000

Provision for depreciation, 1 April 1999 Furniture and fittings

427000

Motor vehicles

118000

Retained profits

93600

General reserve

67000

Trade debtors

364600

Trade creditors

241200

Stock, 1 April 1999

26410

10% loan (borrowed in 1998 and repayable in 2002)

200000

Cash at bank

333290

Share premium

401000

Provision for doubtful debts, 1 April 1999

5400

Sales

2954300

Purchases

1716600

Loan interest

15000

Carriages inwards

6000

Sales returns

20000

Purchases returns

9000

Administration expenses

409150

Selling and distribution expenses

205450

Interim ordinary dividend

20000 5116500

5116500

Additional information: i.

Depreciation was to be charged as follows: Furniture and fittings – 10% on net book value Motor vehicles – 20% on cost

ii.

Stock as at 31 March 2000 amounted to $28500.

iii.

The following adjustments were to be made on 31 March 2000: $ Accrued carriage inwards 400 Prepaid administration expenses

iv.

9600

An amount of $2200 owing from a customer was to be settled by contra with his account as a supplier. Trade debtors amounting to $4000 were to be written off and a provision for doubtful debts was to be maintained at 3% of trade debtors.

v.

Directors’ fees of $35000 were to be provided for.

vi.

The directors resolved to transfer $85000 to the general reserve and to propose a final

HCKEE-PRINCIPLES OF ACCOUNTS-2000

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ordinary dividend of $0.50 per share. vii.

On 1 April 1999, $300000 9% debentures were issued at 98. The company debited the bank account and credited the share premium account in respect of this issue. Discount on debentures was to be written off against the share premium account evenly over three years. No debenture interest has yet been paid.

Required: a. Prepare the trading, profit and loss and appropriation account of Moon Limited for the year ended 31 March 2000. (10 marks) b. The balance sheet of Moon Limited as at the same date. (10 marks) 9. Chau, Lok and Yeung were partners sharing profits and losses in the ratio of 3:2:1 respectively. They decided to dissolve their partnership on 30 April 2000.

At the date of dissolution, their draft balance sheet was as follows:

$

$

Fixed Assets Office premises

542250

Motor vehicles

198225 740475

Goodwill

146000

Current Assets Stock

61575

Debtors

67800

Bank

9525 138900

Less: Current Liabilities Creditors

137600

1300 887775

Capital Accounts: Chau

157105

Lok

700670

Yeung

30000 887775

It was agreed that the partnership be dissolved on the following terms: i.

Goodwill was to be written off.

ii.

The motor vehicles were taken over by the partners at agreed values as Chau $60000 and Lok $72000.

iii.

The office premises were sold at a profit of $60600.

iv.

Paying by personal cheque, Chau took over at book value stock amounting to $20000. The remaining stock was sold for 80% of the book value.

v.

The debtors were realised at $54240.

vi.

Lok was to take over the creditors at book value. A discount of 5% was allowed to him by the creditors on settlement.

HCKEE-PRINCIPLES OF ACCOUNTS-2000

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vii.

Realisation expenses amounted to $36500.

viii.

Since Yeung was insolvent, he was only required to contribute $1000 towards the partnership. His deficiency was to be borne by the other partners in their profit and loss sharing ratio.

Required to prepare: a. the realisation account. (8 marks) b. the bank account. (5 marks) c. the partners’ capital accounts in columnar form, including the final settlement among them. (7 marks) 10. The trial balance of Classics Limited at 31 March 2000 did not agree and a suspense account was debited with a difference of $1260. The draft net profit for the year amounted to $39426. Subsequent checking of the records revealed the following: i.

A payment of $2600 to Tony Company had been posted to the personal account as $260.

ii.

A petty cash balance of $400 had been omitted from the trial balance.

iii.

Wages amounting to $1200 for the installation of office equipment had been recorded in the wages account.

iv.

Cash sales of $2000 had been correctly entered in the cash book, but the sales account was credited with $2020.

v.

A provision for doubtful debts of $2900, which amounted to 2% of debtors at year end, was made. However, a provision of 2.5% should have been provided.

vi.

Goods with a list price of $5000 were purchased and a 10% trade discount was given by Overseas Ltd. The company was also granted a cash discount of 7% for early settlement of the debt. The amount of $5000 was recorded both at the time of purchase and at the time of payment to Overseas Ltd.

vii.

The company has entered into a joint venture with Modern Limited since 1998. The company recorded the reimbursement of transportation expenses of $1000 to a customer of the joint venture as a motor vehicle expense of the company.

viii.

A purchase of goods amounting to $1500 from the joint venture had only been recorded in the purchases account.

Required: a. Prepare journal entries to correct the above. (Narrations are not required.) (12 marks) b. Draw up the suspense account. (4 marks) c. Prepare a statement to correct the draft net profit for the year ended 31 March 2000. (4 marks) END OF PAPER