Frank Wood's Business Accounting HK Edition (3rd Edition) Solution

Question 1-2A Fixtures $1,200 + Van $6,000 + Inventory $2,800 + Bank $200 + Cash $175 = Total assets $10,375. Loan $2,500 + Creditors $1,600 + Capital (difference) $6,275 = $10,375.

Question 1-4A

A Bao Balance Sheet as at 30 June 20X6

$ Fixed assets Equipment

$ 3,400

Current assets Inventory of goods 3,600 Debtors 4,500 Cash at bank 2,800 10,900 Less Current liabilities Creditors (4,100 )

6,800 10,200

Capital

10,200

Question 1-6A Effect upon Assets

Liabilities

(a)

+ Van

+ Creditors

(b)

– Cash

– Loan from F Du

(c)

+ Inventory – Bank

(d)

+ Cash

(e)

+ Inventory – Debtors

(f)

+ Inventory

(g)

– Cash

(h)

– Bank

Capital

+ Capital

+ Creditors – Capital – Creditors

Frank Wood’s Business Accounting 1 Solutions Manual Hong Kong Edition Third Edition © Pearson Education Limited 2006

Question 1-8A

J Ho Balance Sheet as at 7 December 20X9

Fixed assets Equipment ($6,200 + $110) Car

$

$

6,310 7,300

13,610

Current assets Inventory of goods ($8,100 + $380) 8,480 Debtors ($4,050 – $640 – $90) 3,320 Bank ($9,100 – $380 – $1,150 + $640 + $1,300) 9,510 Cash ($195 + $90 + $200) 485 21,795 Less Current liabilities Creditors ($2,800 + $110 – $1,150) (1,760 )

20,035 33,645

Capital

33,645

Question 2-3A

Bank

$ (1) Capital 16,000 (2) Van (25) Cash 400 (12) Cash (19) Carton Cars Ltd (30) Office fixtures

$ 6,400 180 7,100 480

Office Fixtures

(5) Old Ltd (15) Cash (30) Bank

$ 900 120 480

Capital

$ (1) Bank 16,000 (12) Bank (21) Loan: B Bei (2) Bank (8) Carton Cars Ltd

Cash $ 180 (15) Office fixtures 500 (25) Bank Vans $ 6,400 7,100


$ 120 400

Old Ltd

(5) Office fixtures

$ 900

Carton Cars Ltd

(19) Bank

$ 7,100 (8) Van

Loan: B Bei

(21) Cash

$ 7,100

$ 500

Question 2-4A

Bank

$ (1) Capital 9,000 (8) Cash (2) Loan: B Bao 2,000 (15) Loan: B Bao (17) Clearcount Ltd

Loan: B Bao

(15) Bank (24) Cash

$ 200 500 420

$ 500 (2) Bank 250

$ 2,000

Display Equipment

(5) Clearcount Ltd

$ 420

Capital

(1) Cash (1) Bank

$ 750 9,000

Cash

(1) Capital (8) Bank

$ 750 (3) Computer 200 (24) Loan: B Bao

$ 600 250

Computer

(3) Cash

$ 600 Clearcount Ltd

(17) Bank

$ 420 (5) Display equipment

$ 420


F Chung

(31) Printer

Printer

(31) F Chung

$ 200

$ 200

Question 3-2A

Cash

(1) Capital (19) Sales

$ 7,400 (2) Bank 54 (7) Purchases

Purchases

(4) J Wat (7) Cash

$ 410 362

Returns Outwards

(12) J Wat (12) Returns outwards (29) Bank (10) Sales

$ 42 (4) Purchases 368

$ 410

L Lee $ 218 Bank $ 4,920 368 820

Sales

(10) L Lee (19) Cash

$ 42

J Wat

$ (2) Cash 7,000 (5) Van (24) Loan: F Ho 1,500 (29) J Wat (31) Fun Ltd

$ 7,000 362


$ 218 54

Fixtures

(22) Fun Ltd

$ 820

Van

(5) Bank

$ 4,920

Loan: F Ho

(24) Bank

Fun Ltd

(31) Bank

$ 820 (22) Fixtures

Capital

(1) Cash

$ 1,500

$ 820

$ 7,400

Question 3-4A

Bank

$ (1) Capital 18,000 (21) Printer (18) Cash 250 (29) B Hon

$ 620 1,373

Cash

(5) Sales (12) Sales

$ 210 (18) Bank 305

$ 250

B Hon

(6) Returns outwards (29) Bank

$ 82 (2) Purchases 1,373

$ 1,455

G Sze

$ (28) Returns outwards 47 (3) Purchases (8) Purchases

$ 472 370

P Sin

(10) Sales

$ 483 (23) Returns inwards

$ 160


H Chan

(22) Sales


$ 18

A Choi

(31) Machinery

$ 419

Capital

$ (1) Bank 18,000

Purchases

(2) B Hon (3) G Sze (8) G Sze

$ 1,455 472 370

Sales

(5) Cash (10) P Sin (12) Cash (22) H Chan

Returns Inwards

(23) P Sin (25) H Chan

$ 160 18

Returns Outwards

(6) B Hon (28) G Sze

$ 210 483 305 394

Machinery

(31) A Choi

$ 419

Printer

(21) Bank

$ 620


$ 82 47

Question 4-3A Dr $ Jul 1 Bank 5,000 Cash 1,000 Capital " 2 Stationery 75 Bank " 3 Purchases 2,100 T So " 4 Cash 340 Sales " 5 Insurance 290 Cash " 7 Computer 700 J Ho " 8 Expenses 32 Bank " 10 C Bao 630 Sales " 11 T So 55 Returns outwards " 14 Wages 210 Cash " 17 Rent 225 Bank " 20 Bank 400 C Bao " 21 J Ho 700 Bank " 23 Stationery 125 News Ltd " 25 F Tang 645 Sales " 31 News Ltd 125 Bank

Cr $

6,000 75 2,100 340 290 700 32 630 55 210 225 400 700 125 645 125

Question 4-4A

Bank

$ (1) Capital 11,000 (5) Stationery (24) K Fong 250 (16) Rates (28) Rates 45 (19) Rent (28) J Leung (28) D Ma (28) B Bo

$ 62 970 75 830 415 6,100


Cash

$ (1) Capital 1,600 (3) Purchases (4) Rent (7) Wages (11) Rent (18) Insurance (21) Motor expenses (23) Wages

$ 370 75 160 75 280 24 170

Capital

$ (1) Bank 11,000 (1) Cash 1,600 (4) Cash (11) Cash (19) Bank

$ 75 75 75

Wages

(7) Cash (23) Cash

$ 160 170 Stationery

(5) Bank

$ 62

Rates

(16) Bank (18) Cash (20) B Bo (21) Cash

Rent

$ 970 (28) Bank Insurance $ 280 Van $ 6,100 Motor Expenses $ 24


$ 45

Purchases

(2) J Leung (2) D Ma (2) P Lo (3) Cash

$ 830 610 590 370 Sales

(6) D To (6) B Ho (6) K Fong (15) T Lee (15) F Sin (15) G Man

$ 370 290 410 205 280 426

Returns Outwards

(10) D Ma

$ 195

Returns Inwards

(13) B Ho

$ 35

J Leung

(28) Bank

$ 830 (2) Purchases

$ 830

D Ma


$ 195 (2) Purchases 415

$ 610

P Lo

(2) Purchases

$ 590

B Bo

(28) Bank

$ 6,100 (20) Van

$ 6,100

D To

(6) Sales

$ 370 B Ho

(6) Sales


$ 35


K Fong

(6) Sales

$ 410 (24) Bank

$ 250

T Lee

(15) Sales

$ 205 F Sin

(15) Sales

$ 280 G Man

(15) Sales

$ 426

Question 4-6A (A) Goods bought on credit $27,000. (B) Borrowed $35,000 and immediately spent it on land and buildings $35,000. (C) Sold goods costing $20,000 for $30,000 on credit. (D) Debtors paid $13,000. (E) Debtors paid $2,000; this amount was taken by proprietors. (F) Took $5,000 drawings by cheque and paid off $3,000 accrued expenses by cheque. (G) Equipment costing $30,000 sold for $21,000 — paid by cheque. (H) Goods taken for own use $1,000. (I) Took $6,000 cash as drawings. Could also be $6,000 cash stolen — thus reducing cash and causing a loss.

Question 5-6A (1) Sales (21) Sales (1) Balance b/d

10

G Woo $ 310 (19) Bank 90 (31) Balance c/d 400

$ 310 90 400

90

K Hung

(1) Sales (8) Sales (21) Sales

$ 42 (31) Balance c/d 161 430 633

(1) Balance b/d

633


$ 633

633

F Dai

$ (1) Sales 1,100 (10) Returns inwards (8) Sales 224 (19) Bank (31) Balance c/d 1,324 (1) Balance b/d

$ 31 750 543 1,324

543 M Lok

$ (1) Sales 309 (10) Returns inwards (12) Cash 309

$ 82 227 309

T So


$ 15 (2) Purchases 175 190

$ 190 190

J Lee

$ (31) Balance c/d 278 (2) Purchases (9) Purchases 278

$ 63 215 278

(1) Balance b/d

278

P Tin

(28) Bank (31) Balance c/d

$ 180 (2) Purchases 30 210

$ 210

(1) Balance b/d

30

210

F Ruan

(15) Returns outwards (28) Bank (31) Returns outwards (31) Balance c/d

$ 21 (2) Purchases 100 (9) Purchases 18 215 354

$ 190 164

(1) Balance b/d

215

354

Woo, Hung and Dai are debtors. Lee, Tin and Ruan are creditors.


11

Question 5-7A

G Woo

Dr Cr 20X7 $ $ May 1 Sales 310 " 19 Bank 310 " 21 Sales 90

K Hung

20X7 May 1 Sales " 8 Sales " 21 Sales

Dr Cr $ $ 42 161 430

Balance $ 309 Dr 227 Dr 0

Balance $ 190 Cr 175 Cr 0

J Lee

Dr 20X7 $ May 2 Purchases " 9 Purchases

Cr $ 63 215

Balance $ 63 Cr 278 Cr

Dr Cr 20X7 $ $ May 2 Purchases 210 " 28 Bank 180

Balance $ 210 Cr 30 Cr

12

Dr Dr Dr Dr

T So

Dr Cr 20X7 $ $ May 2 Purchases 190 " 15 Returns outwards 15 " 28 Bank 175

Balance $ 1,100 1,324 1,293 543

M Lok

Dr Cr 20X7 $ $ May 1 Sales 309 " 10 Returns inwards 82 " 12 Bank 227

Balance $ 42 Dr 203 Dr 633 Dr

F Dai

Dr Cr 20X7 $ $ May 1 Sales 1,100 " 8 Sales 224 " 10 Returns inwards 31 " 19 Bank 750

Balance $ 310 Dr 0 90 Dr

P Tin


F Ruan

Dr Cr 20X7 $ $ May 2 Purchases 190 " 9 Purchases 164 " 15 Returns outwards 21 " 28 Bank 100 " 31 Returns outwards 18

Balance $ 190 354 333 233 215

Cr Cr Cr Cr Cr

Question 6-2A

Bank

$ $ (1) Capital 15,000 (6) Rent 175 (28) T Pok 71 (7) Rates 130 (28) J Fan 42 (23) J Sin 272 (30) Capital 900 (23) F Bo 1,200 (23) T Ren 500 (25) Van 6,200 (30) Balance c/d 7,536 16,013 16,013 (1) Balance b/d

7,536 Cash

(5) Sales (26) Loan: B Ban

$ 610 (17) Wages 750 (30) Balance c/d 1,360

(1) Balance b/d

1,070

Purchases

(3) J Sin (3) F Bo (3) T Ren (3) R Chen (19) R Chen (19) T Ren (19) F Jia

$ 290 (30) Balance c/d 1,200 610 530 110 320 165 3,225

(1) Balance b/d

3,225

$ 290 1,070 1,360

$ 3,225

3,225


13

Sales

$ (30) Balance c/d 2,383 (5) Cash (11) T Pok (11) J Fan (11) T Gao 2,383

$ 610 85 48 1,640 2,383

(1) Balance b/d

2,383

Capital

$ $ (30) Balance c/d 15,900 (1) Bank 15,000 (30) Bank 900 15,900 15,900 (1) Balance b/d 15,900

Rent

(6) Bank

$ 175 (30) Balance c/d

(1) Balance b/d

175

Rates

(7) Bank


(1) Balance b/d

130


(1) Balance b/d

290

$ 290

Returns Outwards

$ (30) Balance c/d 45 (18) J Sin (18) R Chen 45

$ 18 27 45

(1) Balance b/d

45

14

$ 130

Wages

(17) Cash

$ 175

Returns Inwards

(20) J Fan (20) T Pok

$ 6 (30) Balance c/d 14 20

(1) Balance b/d

20


$ 20 20

Vans

$ $ (21) Turnkey Motors 4,950 (30) Balance c/d 11,150 (25) Bank 6,200 11,150 11,150 (1) Balance b/d 11,150

J Sin


$ 18 (3) Purchases 272 290

$ 290 290

F Bo

(23) Bank

$ 1,200 (3) Purchases

$ 1,200

T Ren

(23) Bank (30) Balance c/d

$ 500 (3) Purchases 430 (19) Purchases 930

$ 610 320 930

(1) Balance b/d

430

R Chen

(18) Returns outwards (30) Balance c/d

$ 27 (3) Purchases 613 (19) Purchases 640

$ 530 110 640

(1) Balance b/d

613

F Jia

(30) Balance c/d

$ 165 (19) Purchases

$ 165

(1) Balance b/d

165

T Pok

$ (11) Sales 85 (20) Returns inwards (28) Bank 85

$ 14 71 85

J Fan

$ (11) Sales 48 (20) Returns inwards (28) Bank 48

$ 6 42 48


15

T Gao

(11) Sales

$ 1,640 (30) Balance c/d

(1) Balance b/d

1,640

Turnkey Motors

(30) Balance c/d

$ 4,950 (21) Van

$ 4,950

(1) Balance b/d

4,950

Loan: B Ban

(30) Balance c/d

$ 750 (26) Cash

$ 750

(1) Balance b/d

750

Trial Balance as at 30 November 20X7

Dr $ Bank 7,536 Cash 1,070 Purchases 3,225 Sales Returns outwards Returns inwards 20 Capital Vans 11,150 Rent 175 Rates 130 Wages 290 R Chen T Ren F Jia T Gao 1,640 Turnkey Motors Loan: B Ban 25,236

16

$ 1,640


Cr $

2,383 45 15,900

613 430 165 4,950 750 25,236

Question 6-4A

E Pak Corrected Trial Balance as at 31 December 20X9

Dr $ Motor vehicles 30,000 Office equipment 10,000 Sales Purchases 287,220 Sales returns 1,460 Purchases returns Carriage inwards 200 Carriage outwards 780 Wages 45,190 Insurance 3,000 Rent and rates 5,270 Lighting and heating 4,810 Drawings 35,000 Commission received Bank overdraft Cash in hand 150 Motor vehicle expenses 7,070 General expenses 5,300 Capital Debtors 52,800 Creditors 488,250

Cr $

402,400

390

2,410 26,400

32,700 23,950 488,250

Question 7-3A

B Mui Trading and Profit and Loss Account for the year ended 31 December 20X8

$ Sales Less Cost of goods sold: Purchases 121,040 Less Closing inventory (14,486 ) Gross profit Less Expenses: Salaries 39,560 Rates 2,400 Motor expenses 910 General expenses 305 Insurance 1,240 Net profit

$ 235,812

(106,554 ) 129,258

(44,415 ) 84,843


17

Question 7-4A

G Go Trading and Profit and Loss Account for the year ended 30 June 20X8

$ Sales Less Cost of goods sold: Purchases 245,950 Less Closing inventory (29,304 ) Gross profit Less Expenses: Salaries and wages 48,580 Equipment rental 940 Insurance 1,804 Lighting and heating 1,990 Motor expenses 2,350 Sundry expenses 624 Net profit

$ 382,420

(216,646 ) 165,774

(56,288 ) 109,486

Question 8-3A

B Mui Balance Sheet as at 31 December 20X8

Fixed assets Premises Car

18

$

$

53,000 4,300

57,300

Current assets Inventory 14,486 Debtors 21,080 Bank 2,715 Cash 325 38,606 Less Current liabilities Creditors (11,200 )

27,406 84,706

Capital Balance at 1.1.20X8 Add Net profit Less Drawings

23,263 84,843 108,106 (23,400 ) 84,706


Question 8-4A

G Go Balance Sheet as at 30 June 20X8

Fixed assets Building Fixtures Lorry

$

$

174,000 4,600 19,400

198,000

Current assets Inventory 29,304 Debtors 44,516 Bank 11,346 85,166 Less Current liabilities Creditors (23,408 )

61,758 259,758


194,272 109,486 303,758 (44,000 ) 259,758

Question 8-6A

G Hung Balance Sheet as at 30 June 20X9

$ Fixed assets Office equipment Motor vehicles

$

$

5,000 5,400

10,400

Current assets Inventory 6,900 Debtors 16,255 Cash in hand 55 23,210 Less Current liabilities Creditors 10,930 Bank overdraft 3,230 (14,160 ) Net current assets Less Long-term bank loan

9,050 19,450 (2,000 ) 17,450

Capital Balance as at 1.7.20X8 Add Net profit Less Drawings

12,000 34,250 46,250 (28,800 ) 17,450


19

Question 8-8A Capital at 1 January 20X9 = $(18,000 + 4,800 + 24,000 + 760 + 15,600 – 8,000 – 6,000) = $49,160 Capital at 31 December 20X9 = $(16,200 + 5,800 + 28,000 + 240 + 4,600 + 16,000 – 11,000 – 2,000) = $57,840 Increase in capital ($57,840 – $49,160) Add Drawings ($200 × 52) Less Capital introduced Net profit

$ 8,680 10,400 19,080 (4,000 ) 15,080

A Trader Balance Sheet as at 31 December 20X9

Fixed assets Fixtures Motor vehicle

$

$

16,200 16,000

32,200

Current assets Inventory 28,000 Debtors 5,800 Bank 4,600 Cash 240 38,640 Less Current liabilities Creditors (11,000 ) Less Long-term liabilities Loan from B Bao Capital account Balance at 1 January 20X9 Add Capital introduced Net profit Less Drawings

20


27,640 59,840 (2,000 ) 57,840 49,160 4,000 15,080 68,240 (10,400 ) 57,840

Question 9-2A

Sunny Ray Company Trading and Profit and Loss Account for the year ended 31 December 20X2

$ $ Sales Less Cost of goods sold: Inventory as at 31 December 20X1 70,000 Add Purchases 119,000 Less Returns outwards (12,000 ) 107,000 177,000 Carriage inwards 1,500 178,500 Less Inventory as at 31 December 20X2 (80,000 ) Gross profit Less Expenses: Wages 15,000 Insurance 2,000 Rent 6,000 Office expenses 2,500 Lighting 3,000 Printing 4,000 Stationery 1,000 Carriage outwards 4,500 Net profit

$ 180,000

(98,500 ) 81,500

(38,000 ) 43,500

Question 9-5A

T Fong Trading and Profit and Loss Account for the year ended 31 March 20X9

$ $ Sales Less Cost of goods sold: Opening inventory 52,800 Add Purchases 141,300 Less Returns outwards (2,408 ) 138,892 Carriage inwards 1,350 193,042 Less Closing inventory (58,440 ) Gross profit Less Expenses: Wages and salaries 63,400 Carriage outwards 5,840 Rates 3,800 Communication expenses 714 Commissions paid 1,930 Insurance 1,830 Sundry expenses 208 Net profit

$ 276,400

(134,602 ) 141,798

(77,722 ) 64,076


21

Balance Sheet as at 31 March 20X9

Fixed assets Buildings Fixtures

$

$

125,000 1,106

122,106


111,166 237,272


210,516 64,076 274,592 (37,320 ) 237,272

Question 9-6A

B Chan Trading and Profit and Loss Account for the year ended 30 September 20X8

$ $ Sales 391,400 Less Returns inwards (2,110 ) Less Cost of goods sold: Opening inventory 72,410 Add Purchases 254,810 Less Returns outwards (1,240 ) 253,570 Carriage inwards 760 326,740 Less Closing inventory (89,404 ) Gross profit Less Expenses: Wages and salaries 39,600 Carriage outwards 2,850 Motor expenses 1,490 Rent 8,200 Telephone charges 680 Insurance 745 Office expenses 392 Sundry expenses 216 Net profit

22


$ 389,290

(237,336 ) 151,954

(54,173 ) 97,781

Balance Sheet as at 30 September 20X8

Fixed assets Van Office equipment

$

$

5,650 7,470

13,120


105,736 118,856

Capital Balance as at 1.10.20X7 Add Net profit Less Drawings

49,675 97,781 147,456 (28,600 ) 118,856

Question 9-8A (a) – (b)

Capital

Jul 1 Balance b/d

$ 9,700

Inventory

Jul 1 Balance b/d

$ 5,000 OK Ltd

Jul Bank " 31 Balance c/d

$ 3,000 Jul 1 Balance b/d 1,400 Purchases 4,400

$ 500 3,900 4,400

Aug 1 Balance b/d

1,400

AB Ltd

Jul 1 Balance b/d Sales

$ 300 Jul Bank 600 " 31 Balance c/d 900

Aug 1 Balance b/d

600

$ 300 600 900


23

Equipment

Jul 1 Balance b/d

$ 3,700 Jul 31 Balance c/d

Aug 1 Balance b/d

3,700

Bank

Jul 1 Balance b/d Sales AB Ltd

$ 1,200 Jul OK Ltd 3,200 General expenses 300 " 31 Balance c/d 4,700

Aug 1 Balance b/d

1,200

$ 3,000 500 1,200 4,700

Sales

$ Jul 31 Balance c/d 3,800 Jul Bank AB Ltd 3,800

$ 3,200 600 3,800

Aug 1 Balance b/d

3,800

Purchases

Jul OK Ltd

$ 3,900 Jul 31 Balance c/d

Aug 1 Balance b/d

3,900

$ 3,900

General Expenses

Jul Bank

$ 500 Jul 31 Balance c/d

Aug 1 Balance b/d

500

(c)

$ 500

Ms Chu Trial Balance as at 31 July

Dr $ Equipment 3,700 Inventory 5,000 Bank 1,200 General expenses 500 Purchases 3,900 AB Ltd 600 OK Ltd Sales Capital 14,900

24

$ 3,700


Cr $

1,400 3,800 9,700 14,900

(d)

Trading and Profit and Loss Account for July

$ Sales Less Cost of goods sold: Opening inventory 5,000 Add Purchases 3,900 8,900 Less Closing inventory (6,200 ) Gross profit Less General expenses Net profit (e)

$ 3,800

(2,700 ) 1,100 (500 ) 600

Balance Sheet as at 31 July

$ Fixed assets Equipment

$ 3,700

Current assets Inventory 6,200 Debtor 600 Bank 1,200 8,000 Less Current liability Creditor (1,400 )

6,600 10,300

Capital Add Net profit

9,700 600 10,300

Question 10-6A (a) Accruals concept The accruals concept states that revenues and expenses are recognised in the profit and loss account in the period in which they have been earned, and not when they are received or paid. It also means that revenues should be matched against the expenses incurred in earning those revenues. Example: Telephone bills received for the month of December 20X7 but not paid by year end are to be recognised as expenses for the year ended 31 December 20X7 and matched against revenues earned during that year. (b) Money measurement concept The money measurement concept states that accounting is concerned only with transactions that can be measured in monetary units, and that general agreement can be obtained in respect of the monetary values of such transactions. Example: Accounting can record the value of a motor vehicle but not the value of quality management or good labour relations, even though such an ‘asset’ can bring benefits to the business through higher profits.


25

(c) Substance over form concept When the legal form of a transaction differs from its real substance, accounting should show the transaction in accordance with its real substance, that is, how the transaction affects the economic situation of the business, so long as it is legally permissible to do so. Example: Machinery acquired under a financial lease will be recorded as an asset with an associated liability, even though the legal ownership of the machinery does not pass to the lessee until the lessee has made the final instalment payment under the lease agreement. (d) Consistency concept The consistency concept states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way from one period to another. The method used can be changed if it can be demonstrated that the change will result in a more appropriate presentation of events or transactions, or is required by a new accounting standard. Example: The depreciation methods and rates adopted for different classes of fixed assets should remain the same from one period to another unless there are compelling reasons to change them. (e) Duality concept The duality concept means that there are two aspects of accounting, one represented by the assets of the business and the other by the claims against it. These two aspects are always equal to each other. Example: The payment of cash to a trade creditor requires the recording of a decrease in trade creditors’ balance and an equal decrease in cash. (f) Prudence concept The prudence concept ensures that financial statements are neutral, that is, gains and losses are neither overstated nor understated. For revenues or gains, they should not be anticipated and recorded in the books unless their realisation is reasonably certain. For expenses or losses, they should be anticipated and provided for, even if exact amounts are not available. Example: In inventory valuation, if the net realisable value of inventory is higher than the cost, the gain will not be recognised until the inventory is sold. On the other hand, if the net realisable value is lower than the cost, the loss will be recognised immediately.

Question 11-2A Name of Account

(a) Type of Account

(b) Balance

Drawings

Personal

Debit

Furniture

Real

Debit

Nominal

Debit

Sales

Nominal

Credit

William Ng (supplier)

Personal

Credit

Discounts allowed

Nominal

Debit

Dickson Lo (customer)

Personal

Debit

Real

Debit

Personal

Credit

Rent

Cash HSBC (overdraft)

26


Question 13-2A

Cash Book

Cash Bank Cash $ $ $ (1) Balances b/d 295 4,240 (3) Bank ¢ 200 (2) Sales 310 (5) Postage 80 (3) Cash ¢ 200 (6) Office equipment (4) F Bei 194 (7) L Kan (9) Rates 115 (11) Cash ¢ (11) Bank ¢ 150 (12) Wages 400 (13) Sales 430 (14) Motor expenses (16) J Chow (loan) 1,500 (28) General expenses 35 (20) K Wu 174 (30) Insurance (30) Balances c/d 1,970 2,685 4,923 2,685

Bank $

310 94 150 81 320 3,968 4,923

Question 13-4A

Cash Book

Discount Cash Bank Discount Cash Bank $ $ $ $ $ $ (1) Balances b/d 420 4,940 (5) Rent 340 (2) S Ba 41 779 (6) M Poon 9 351 (2) L Ping 16 304 (6) G Guo 24 936 (2) G Ho 22 418 (6) F Bo 10 390 (2) M Ren 52 988 (8) Cash ¢ 400 (3) Sales 740 (14) Wages 540 (8) Bank ¢ 400 (16) R To 15 295 (10) Sales 1,260 (16) F Du 12 400 (12) B Au 4 276 (20) Fixtures 4,320 (29) A Lin 324 (24) Lorry 14,300 (30) Sales 980 (30) Stationery 56 (30) Balance c/d 12,623 (30) Balance c/d 2,124 135 3,060 21,392 70 3,060 21,392

Discounts Allowed

(30) Total for the month

$ 135

Discounts Received


$ 70


27

Question 13-6A (a)

C Cheng Cash Book

Discount Cash Bank Discount Cash Bank 20X9 $ $ $ 20X9 $ $ $ May 1 Balance b/d 400 May 1 Balance b/d 14,000 " 3 D Hui 80 3,920 " 1 Travelling " 10 Sales 1,800 expenses 60 " 11 Sales 300 " 4 Petty cash " 29 S Kam 1,400 book 100 " 31 Balance c/d 19,784 " 5 Telephone 820 " 6 B Li 32 3,168 " 9 Salaries 1,750 " 11 Purchases 200 " 12 Jayson Lo 34 1,666 " 16 Rent 1,650 " 17 Stamps 100 " 23 Wages 1,850 " 25 Drawings 140 " 28 Overdraft interest 500 " 31 S Kam: dishonoured cheque 1,400 " 31 Balance c/d 200 80 700 26,904 66 700 26,904 Jun

1 Balance b/d

200 Jun

1 Balance b/d 19,784

(b) General Ledger

Discounts Allowed

2 0X9 May 31 Total for the month

$ 80

Discounts Received

20X9 May 31 Total for the month (c) Sales Ledger

28

$ 66

S Kam

20X9 ay 1 Balance b/d M

$ 20X9 1,400 May 29 Bank

$ 1,400

"

31 Bank: Dishonoured cheque

1,400

1,400

Jun

1 Balance b/d

1,400

"

31 Balance c/d


Question 14-2A (a) Invoice summaries:

A Poon

22 metres plastic tubing × $10 6 sheets foam rubber × $30 4 boxes vinyl padding × $50 Less Trade discount 25%

B Kong

50 lengths polythene sheeting × $20 8 boxes vinyl padding × $50 20 sheets foam rubber × $30 Less Trade discount 20%

$ 40 660 900 1,600 (400 ) 1,200

L Mao

29 metres plastic tubing × $10

$ 1,000 400 600 2,000 (400 ) 1,600

A Lai

4 metres plastic tubing × $10 33 lengths polythene sheeting × $20 30 sheets foam rubber × $30 Less Trade discount 25%

$ 220 180 200 600 (150 ) 450

$ 290

M Au

32 metres plastic tubing × $10 24 lengths polythene sheeting × $20 20 boxes vinyl padding × $50 Less Trading discount 33 13 %

$ 320 480 1,000 1,800 (600 ) 1,200


29

(b)

Sales Day Book

Jun 1 A Poon " 5 B Kong " 11 A Lai " 21 L Mao " 30 M Au Sales Ledger

A Poon

20X9 Jun 1 Sales

$ 450

B Kong

20X9 Jun 5 Sales

$ 450 1,600 1,200 290 1,200 4,740

$ 1,600 A Lai

20X9 Jun 11 Sales

$ 1,200 L Mao

20X9 Jun 21 Sales

$ 290 M Au

20X9 Jun 30 Sales (c) General Ledger

$ 1,200

Sales

20X9 Jun 30 Total for the month

$ 4,740

Question 15-2A Workings: Invoices

F Dai

2 sets golf clubs × $800 5 footballs × $40 Less Trade discount 25%

30


$ 1,600 200 1,800 (450 ) 1,350

G So

6 cricket bats × $60 6 ice skates × $35 4 rugby balls × $30 Less Trade discount 20%

F Ho

6 sets golf trophies × $90 4 sets golf clubs × $900 Less Trade discount 33 13 %

$ 1,350 552 2,760 195 384 5,241

F Dai

(2) Purchases

$ 640 (256 ) 384

Purchases Day Book

(2) F Dai (11) G So (18) F Ho (25) L To (30) M Mo (b) Purchases Ledger

$ 260 (65 ) 195

M Mo

8 goal posts × $80 Less Trade discount 40% (a)

$ 540 3,600 4,140 (1,380 ) 2,760

L To

5 cricket bats × $52 Less Trade discount 25%

$ 360 210 120 690 (138 ) 552

$ 1,350

G So

(11) Purchases

$ 552


31

F Ho

(18) Purchases

$ 2,760

L To

(25) Purchases

$ 195

M Mo

(30) Purchases (c) General Ledger

Purchases


$ 5,241

$ 384

Question 15-4A (a)

Purchases Day Book

(9) C Choy (16) A Chan (31) M Nam

Sales Day Book

(1) M Ma (7) R Lau (23) T Young (b) Purchases Ledger

$ 160

M Nam

(31) Purchases

32

$ 240

A Chan

(16) Purchases

$ 45 200 160 405

C Choy

(9) Purchases

$ 240 160 50 450


$ 50

Sales Ledger

M Ma

(1) Sales

$ 45

R Lau

(7) Sales

$ 200

T Young

(23) Sales

$ 160

(c) General Ledger

Purchases


$ 450 Sales


$ 405

Question 16-2A

Sales Day Book

(3) E Cha (3) E Pat (3) F Tung (8) A Go (8) H Guo (8) J Fung (20) E Pat (20) F Pao (20) E Lee

$ 510 246 356 307 250 185 188 310 420 2,772

Returns Inwards Day Book

(14) E Pat (14) F Tung (31) E Pat (31) E Cha

$ 18 22 27 30 97


33

Purchases Day Book

(1) K Ho (1) M Ko (1) N So (5) R Mo (5) J Chan (5) D Eu (5) C Du (24) C Fung (24) K Cheung

Returns Outwards Day Book

(12) M Ko (12) N So (31) J Chan (31) C Du Sales Ledger (3) Sales (3) Sales (20) Sales (3) Sales (8) Sales (8) Sales (8) Sales

34

$ 380 500 106 200 180 410 66 550 900 3,292

$ 30 16 13 11 70

E Cha $ 510 (31) Returns inwards

$ 30

E Pat $ 246 (14) Returns inwards 188 (31) Returns inwards

$ 18 27

F Tung $ 356 (14) Returns inwards A Go $ 307 H Guo $ 250 J Fung $ 185


$ 22

F Pao

(20) Sales

$ 310 E Lee

(20) Sales Purchases Ledger

$ 420

K Ho

(1) Purchases

M Ko

(12) Return outwards

$ 30 (1) Purchases

$ 500

N So

(12) Return outwards

$ 16 (1) Purchases

R Mo

(5) Purchases

J Chan

(31) Returns outwards

$ 13 (5) Purchases

$ 106

$ 200

$ 180

D Eu

(5) Purchases

C Du

(31) Returns outwards

$ 11 (5) Purchases

C Fung

(24) Purchases

$ 380

$ 410

$ 66

$ 550

K Cheung

(24) Purchases

$ 900


35

General Ledger

Sales


$ 2,772

Returns Inwards


$ 97

Purchases


$ 3,292

Returns Outwards


$ 70

Question 16-4A (a)

K King Sales Day Book

Invoice No Details 20X9 $ Jun 2 M Chan 1,100 Less 15% trade discount 369 (165 ) " 9 N Sin 370 " 13 E Lam 2,000 Less 20% trade discount 372 (400 ) " 16 R Man 550 Less 10% trade discount 376 (55 ) " 24 J Kung 4,300 Less 20% trade discount 381 (860 ) " 26 M Chan 1,600 Less 20% trade discount 384 (320 ) " 30 Transferred to sales account

935 400 1,600 495 3,440 1,280 8,150

Sales Returns Day Book

Note No Details 20X9 $ Jun 23 M Chan 100 Less 15% trade discount 50 (15 ) " 29 N Sin 51 " 30 Transferred to sales returns account

36

Amount $


Amount $

85 70 155

(b) General Ledger

Sales


$ 8,150

Sales Returns


$ 155

(c) Sales Ledger

M Chan

20X9 $ 20X9 $ Jun 1 Balance b/d 830.00 Jun 23 Sales returns 85.00 " 2 Sales 935.00 " 30 Bank 2,841.60 " 26 Sales 1,280.00 " 30 Discount ($2,960 × 4%) 118.40 3,045.00 3,045.00

Question 17-3A 20X7 Apr 1 Fixtures Dr " 4 Drawings Dr " 9 Purchases Dr " 12 Office equipment Dr " 18 J Ha Dr " 24 Cash Dr " 30 Office equipment Dr

$ 180,900 : J Ha Cr 50,000 : Purchases Cr 2,800 : Drawings Cr 50,000 : K Lam Cr 6,500 : Fixtures Cr 6,800 : J Chan Cr 219,000 : Super Offices Cr

$ 180,900 50,000 2,800 50,000 6,500 6,800 219,000

Question 17-5A

The Journal

Dr $ 1 Computer 26,800 Hi-Tech Co 2 Drawings 2,000 Cash 3 Computer software 1,250 Licence fee 500 A-Tech Company 4 Cash 600 Jackson Lee 5 Motor car (new) 130,000 Motor car (old) Grandrace Motors

Cr $ 26,800 2,000

1,750 600 20,000 110,000


37

Dr $ 6 Sure Win Co 8,000 Full Gain Co 7 Bellson Ltd 3,000 Office fixtures 8 Drawings 3,500 Purchases Cash

Cr $ 8,000 3,000 2,000 1,500

Question 18-3A (a)

Leon Leung Petty Cash Book

Voucher Motor Car Postage & Receipts Date Details No Total Expenses Travelling Cleaning Stationery Ledger $ 20X7 $ $ $ $ $ $ 60.00 Aug 1 Balance b/d 440.00 " 1 Bank " 3 Cleaner’s wages 334 40.00 40.00 " 4 Stamps 335 24.00 24.00 " 5 A Lee — creditor 336 16.50 16.50 " 7 Ball pens 337 12.00 12.00 " 9 Petrol 338 30.00 30.00 " 11 Motor car accessories 339 50.20 50.20 " 13 Envelopes 340 12.90 12.90 " 14 Taxi fares 341 20.00 20.00 " 17 Cleaner’s wages 342 80.00 80.00 " 19 MTR fares 343 35.00 35.00 " 23 Petrol 344 32.00 32.00 " 27 Dennis Kong — creditor 345 63.20 63.20 " 28 Cleaning materials 346 55.00 55.00 470.80 112.20 55.00 175.00 48.90 79.70 " 31 Balance c/d 29.20 500.00 500.00

29.20 Sept 1 Balance b/d

(b) Purchases Ledger 20X7 ug 27 Petty cash A

38

Dennis Kong $ 20X7 63.20 Aug 1 Balance b/d


$ 63.20

Question 18-4A (a)

Henry Lo Petty Cash Book

Voucher Postage & Receipts Date Details No Total Cleaning Stationery Travelling Ledger $ 20X8 $ $ $ $ $ $ 244.80 Jan 1 Balance b/d 755.20 " 1 Bank " 1 Floor cleaning 718 75.60 75.60 " 3 Box files and pencils 719 113.60 113.60 " 6 Taxi fares 720 131.40 131.40 " 9 Ferry fares 721 32.60 32.60 " 9 Reimbursement of taxi 18.00 fares by staff — " 13 M Ho — creditor 722 32.00 32.00 " 14 Cleaner’s wages 723 320.00 320.00 " 22 MTR fares 724 54.00 54.00 " 25 Stamps 725 24.00 24.00 " 27 Photocopy paper 726 30.00 30.00 " 29 Paul Chan — creditor 727 52.00 52.00 10.00 " 31 Box files sold to staff — 865.20 395.60 167.60 218.00 84.00 " 31 Balance c/d 162.80 1,028.00 1,028.00 162.80 Feb 1 Balance b/d 837.20 " 1 Bank (b) General Ledger

Travelling

20X8 $ 20X8 $ Jan 1 Balance b/d 5,200.00 Jan 9 Petty cash 18.00 " 31 Petty cash 218.00 " 31 Balance c/d 5,400.00 5,418.00 5,418.00

Postage and Stationery

20X8 $ 20X8 $ Jan 1 Balance b/d 512.00 Jan 31 Petty cash 10.00 " 31 Petty cash 167.60 " 31 Balance c/d 669.60 679.60 679.60 (c) The cashier responsible for the payment of petty cash claims should undertake a check of supporting vouchers related to such expense claims.


39

Question 19-3A (a)

Columnar Purchases Day Book

Computer Audio & Video Date Name of Business Total Accessories Accessories 20X6 $ $ $ Jan 1 AB Ltd 430 430 " 4 JY Co 1,600 1,600 " 6 DY Co 2,400 " 6 MN Co 1,800 " 6 EG Ltd 800 " 8 AB Ltd 900 900 " 15 Hi-Tech Ltd 96 96 " 17 Hi-Tech Ltd 102 102 " 19 Soundbest Co 430 430 " 21 Comlink Co 850 850 9,408 3,780 628

Columnar Sales Day Book

Computer Audio & Video Date Name of Business Total Accessories Accessories 20X6 $ $ $ Jan 9 Albert Yu Co 570 570 " 9 TST Co 87,000 87,000 " 13 HKSC Ltd 1,200 1,200 " 20 F Luk Co 170 170 " 25 Belford Co 260 260 " 25 Longlife Ltd 180 180 " 26 Eatwell Restaurant 2,600 " 29 Beauty Co 490 92,470 87,750 1,630 (b) General Ledger

5,000 CSDB 1 Household Appliances $

2,600 490 3,090

$ 3,780

$ 628

Purchases: Household Appliances

20X6 Jan 31 Total for the month CPDB 1

2,400 1,800 800

Purchases: Audio and Video Accessories


Household Appliances $

Purchases: Computer Accessories


CPDB 1

$ 5,000

Sales: Computer Accessories

20X6 $ Jan 31 Total for the month CSDB 1 87,750 40


Sales: Audio and Video Accessories

20X6 Jan 31 Total for the month CSDB 1

$ 1,630

Sales: Household Appliances

20X6 Jan 31 Total for the month CSDB 1

$ 3,090

Question 19-4A

G Goh Purchases Analysis Book

Lighting & Motor Total Purchases Telephone Heating Expenses Stationery 20X8 $ $ $ $ $ $ Aug 1 J So 108 108 " 3 T Ho 210 210 " 4 BT 65 65 " 5 F Lo 195 195 " 6 Topp Garages 265 265 " 8 Gilly Shop 19 19 " 10 Topp Garages 364 364 " 12 PowerNorth Ltd 39 39 " 15 G Fang 181 181 " 17 B&T Ltd 13 13 " 18 T Pao 222 222 " 19 Overnight Couriers Ltd 46 " 21 J Mo 12 12 " 23 H Kan 193 193 " 27 PMP Ltd 38 " 31 Topp Garages 66 66 2,036 1,109 65 52 695 31

Carriage Inwards $

46

38 84

Question 22-2A Capital: a, c, f. Revenue: b, d, e, g.

Question 22-4A See text for how to distinguish between capital and revenue expenditure. (a) Cost of repairs is always revenue; an extension to an asset is always capital. (b) This is capital expenditure in the same way as buying a van to replace a van is capital expenditure. (c) This is capital expenditure because the asset was improved by the expenditure.


41

Question 22-7A (a) (b) (c) (d) (e) (f)

Revenue Revenue Capital Revenue Capital Revenue

(g) (h) (i) (j) (k) (l)

Capital Revenue Revenue Capital Revenue Capital

(f) (g) (h) (i)

Capital Revenue Revenue Capital

Question 22-10A (a) (b) (c) (d) (e)

Capital Revenue Revenue Revenue Capital

Question 22-11A (a) Balance b/d Survey fees Legal fees Cost of site Architect’s fees Subcontractor charges Transfer from wages Stock of materials used Balance b/d Vendor of Press A Transport cost (Press A) Installation costs (Press A) Vendor of Press B Installation costs (Press B)

Premises $ $ 521,100 Balance c/d 782,100 1,500 3,000 90,000 8,700 69,400 11,600 76,800 782,100 782,100 Plant $ $ 407,500 Balance c/d 608,360 87,300 2,900 2,310 105,800 2,550 608,360 608,360

(b) Cash discount of 2% on Press A. Connected with financing and not the cost of plant. Similarly, debenture interest is not applicable. The $4,700 demolition cost, and $1,400 plus $1,750 cost of hiring lifting gear are not shown separately as they are included in other figures used above.

42


Question 22-13A $ (a) Computers 7,000 Cabling 300 Installation 500 7,800 Less Cash discount (2 12 %) (195 ) Printers (3 × $125) Software Amount capitalised Amount charged to revenue: Consumables ($250 – $50) Training

$

7,605 375 350 8,330 $ 200 500 700

(b) When an amount is not considered to be material — i.e. it is not of interest to the users of the financial statements — it may be treated as a revenue expense rather than being capitalised. In this case, it might be considered that the cost of the cabling ($300 – 2 12 % = $292.50) was not material — the business may, for example, use $300 as the minimum amount to be capitalised, anything costing less than this being treated as a revenue expense.

Question 23-4A (a)

Bad Debts

20X7 $ 20X7 Dec 31 Various debts 1,240 Dec 31 Profit and loss 20X8 20X8 Dec 31 Various debts 2,608 Dec 31 Profit and loss 20X9 20X9 Dec 31 Various debts 5,424 Dec 31 Profit and loss (b)

$ 1,240 2,608 5,424

Provision for Doubtful Debts

20X7 $ 20X7 Dec 31 Balance c/d 1,640 Dec 31 Profit and loss ($41,000 × 4%) 20X8 20X8 Dec 31 Balance c/d ($76,000 × 6%) 4,560 Jan 1 Balance b/d Dec 31 Profit and loss 4,560 20X9 20X9 Dec 31 Profit and loss 160 Jan 1 Balance b/d " 31 Balance c/d ($88,000 × 5%) 4,400 4,560

$ 1,640 1,640 2,920 4,560 4,560 4,560


43

(c)

Balance Sheet (extracts)

Debtors Less Provision for doubtful debts

20X7 $ $ 41,000 (1,640 ) 39,360

20X8 $ $ 76,000 (4,560 ) 71,440

20X9 $ 88,000 (4,400 )

$ 83,600

Question 23-6A (a)

Journal Entries

Dr 20X3 $ (2) Dec 31 Bad debts 2,500 Mr Chan (debtor) (3) Dec 31 Profit and loss ($250,000 × 5%) 12,500 Provision for doubtful debts 20X4 (4) Mar 5 Mr Chan (debtor) 2,500 Bank 2,500 Bad debts recovered Mr Chan (debtor) (5) Dec 27 Bad debts 1,225 Mr Wong (debtor) (6) Dec 31 Provision for doubtful debts 4,100 Profit and loss ($12,500 – $420,000 × 2%) (b) (i)

(ii)

2,500 12,500

2,500 2,500 1,225 4,100

Profit and Loss Account Extract for the year ended 31 December 20X4

Other income Decrease in provision for doubtful debts Bad debts recovered Operating expenses Bad debts

Cr $

$ 4,100 2,500 1,225

Balance Sheet Extract as at 31 December 20X4

Current assets Debtors Less Provision for doubtful debts

$ 420,000 (8,400 ) 411,600

(c) (i) Creating a provision for doubtful debts can avoid overstating profits and debtors. (Prudence concept) (ii) Creating a provision for doubtful debts can relate any loss for the period with the related sales in the same period. (Matching concept)

44


Question 23-8A (a)

Debtors Ledger Control Account

20X2 $ 20X3 $ Apr 1 Balance b/d 1,069,000 Mar 31 Returns inwards 18,600 20X3 " 31 Bank ($1,350,000 – $35,000) 1,315,000 Mar 31 Sales (balance) 1,418,600 " 31 Discounts allowed 96,000 " 31 Bad debts 2,500 " 31 Creditors ledger control: Set off 87,500 " 31 Balance c/d 968,000 2,487,600 2,487,600 (b)

Provision for Doubtful Debts Account

20X3 $ 20X2 $ Mar 31 Profit and loss 11,100 Apr 1 Balance b/d 30,420 " 31 Balance c/d (W1) 19,320 30,420 30,420 (c)

Bad Debts Account

20X3 Mar 31 Debtors ledger control (d)

$ 20X3 2,500 Mar 31 Profit and loss

Provision for Cash Discounts Allowed Account

20X3 $ 20X2 Mar 31 Balance c/d ($500,000 × 99% × 2%) 9,900 Apr 1 Balance b/d 20X3 Mar 31 Profit and loss 9,900 (e)

$ 2,500

$ 8,000 1,900 9,900

Discounts Allowed Account

20X3 $ 20X3 $ Mar 31 Debtors ledger control 96,000 Mar 31 Profit and loss 96,000 (f)

Bad Debts Recovered Account

20X3 $ 20X3 $ Mar 31 Profit and loss 35,000 Mar 31 Bank 35,000


45

(W1) Provision for doubtful debts as at 31 March 20X3 Estimated percentage Period debt owing Amount doubtful $ % Less than 1 month 500,000 1 1 month to 2 months 280,000 2 2 to 3 months 124,000 3 3 to 6 months 28,000 5 Over 6 months 36,000 10 968,000

Question 24-4A (a) Straight line Photocopier cost Yr 1 Depreciation Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation

*Calculation:

$23,000 – $4,000 4

$ 23,000 (4,750 )* 18,250 (4,750 ) 13,500 (4,750 ) 8,750 (4,750 ) 4,000 =

$19,000 4

46

$ 23,000 (8,050 ) 14,950 (5,233 ) 9,717 (3,401 ) 6,316 (2,211 ) 4,105

= $4,750

Question 24-5A (a) Reducing balance Printer cost Yr 1 Depreciation (60% of $800) Yr 2 Depreciation (60% of $320) Yr 3 Depreciation (60% of $128) Yr 4 Depreciation (60% of $51) Yr 5 Depreciation (60% of $20)

(b) Reducing balance Photocopier cost Yr 1 Depreciation (35% of $23,000) Yr 2 Depreciation (35% of $14,950) Yr 3 Depreciation (35% of $9,717) Yr 3 Depreciation (35% of $6,316)

Provision required $ 5,000 5,600 3,720 1,400 3,600 19,320

$ 800 (480 ) 320 (192 ) 128 (77 ) 51 (31 ) 20 (12 ) 8

(b) Straight line Printer cost Yr 1 Depreciation Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation Yr 5 Depreciation

*Calculation:

$800 5

= $160


$ 800 (160 )* 640 (160 ) 480 (160 ) 320 (160 ) 160 (160 ) —

Question 24-6A (a) Reducing balance Bus cost Yr 1 Depreciation (25% of $56,000) Yr 2 Depreciation (25% of $42,000) Yr 3 Depreciation (25% of $31,500) Yr 4 Depreciation (25% of $23,625)

$ 56,000 (14,000 ) 42,000 (10,500 ) 31,500 (7,875 ) 23,625 (5,906 ) 17,719

(b) Straight line Bus cost Yr 1 Depreciation Yr 2 Depreciation Yr 3 Depreciation Yr 4 Depreciation

*Calculation:

$ 56,000 (9,500 )* 46,500 (9,500 ) 37,000 (9,500 ) 27,500 (9,500 ) 18,000

$56,000 – $18,000 4

=

$38,000 4

= $9,500

Question 24-10A (a) (i)

Straight line: $100,000 – $20,000 = $80,000 ÷ 4 = $20,000 depreciation per year.

31.12.20X3 31.12.20X4 31.12.20X5

Cost / NBV Depreciation $ $ 100,000 20,000 80,000 20,000 60,000 20,000

NBV $ 80,000 60,000 40,000

Cost / NBV Depreciation $ $ 100,000 33,000 67,000 22,110 44,890 14,814

NBV $ 67,000 44,890 30,076

4

(ii) Reducing balance: Percentage = 1 –

31.12.20X3 31.12.20X4 31.12.20X5 (b) Sale proceeds Balance b/d at 1.1.20X6 Gain on sale

$20,000 $100,000

= 33%

Straight line Reducing balance $ $ 45,000 45,000 (40,000 ) (30,076 ) 5,000 14,924


47

(c) See text. Straight line is more appropriate when the economic benefits of using an asset reduce evenly over its useful economic life, such as in the case of office furnishings which will deteriorate gradually through wear and tear. Reducing balance is more appropriate when the economic benefits of using an asset reduce rapidly from the start, such as in the case of a motor vehicle — the cost of maintaining it, for example, is very low at the start and, generally, higher the longer it is in use. (d) Net book value represents an estimate of the remaining economic value of an asset expressed financially on a basis which is usually directly related to its original cost, original estimate of its residual value, and original estimated useful economic life.

Question 24-11A Forklift trucks A B C Bought 1.1.20X3 2,400 20X3 Depreciation 30% for 9 months (540 ) 1,860 Bought 1.5.20X4 2,500 20X4 Depreciation 30% × $1,860 (558 ) 30% for 5 months (313 ) 1,302 2,187 Bought 1.10.20X4 3,200 20X5 Depreciation 30% × $1,302 (391 ) 30% × $2,187 (656 ) 30% for 12 months (960 ) 911 1,531 2,240 Bought 1.4.20X6 20X6 Depreciation 30% × $911 (273 ) 30% × $1,531 (459 ) 30% × $2,240 (672 ) 30% for 6 months 638 1,072 1,568

D

3,600

(540 ) 3,060

20X6 Total depreciation provision = $(273 + 459 + 672 + 540) = $1,944

Question 25-3A (a)

Machinery

20X5 $ 20X5 Jan 1 Bank 2,800 Dec 31 Balance c/d 20X6 20X6 Jan 1 Balance b/d 2,800 Dec 31 Balance c/d Oct 1 Bank 3,500 6,300

48


$ 2,800 6,300 6,300

(b)

Fixtures

20X5 $ 20X5 Jan 1 Bank 290 Dec 31 Balance c/d Jul 1 Bank 620 910 20X6 20X6 Jan 1 Balance b/d 910 Dec 31 Balance c/d Dec 1 Bank 130 1,040 (c)

$ 910 910 1,040 1,040

Provision for Depreciation: Machinery

20X5 $ 20X5 Dec 31 Balance c/d 420 Dec 31 Profit and loss ($2,800 × 15%) 20X6 20X6 Dec 31 Balance c/d 1,302 Jan 1 Balance b/d Dec 31 Profit and loss 1,302

$ 420 420 882 * 1,302

$ *$(2,800 – 420) × 15% = 357 $3,500 × 15% = 525 882

Provision for Depreciation: Fixtures

20X5 $ 20X5 ec 31 Balance c/d D 46 Dec 31 Profit and loss ($910 × 5%) 20X6 20X6 Dec 31 Balance c/d 96 Jan 1 Balance b/d Dec 31 Profit and loss 96

$ 46 46 50 * 96

$ *$(910 – 46) × 5% = 43.20 $130 × 5% = 6.50 49.70 rounded to $50. (d)

Balance Sheets (extracts)

31 December 20X5 Machinery at cost Less Accumulated depreciation Fixtures at cost Less Accumulated depreciation

$ 2,800 (420 ) 910 (46 )

31 December 20X6 Machinery at cost Less Accumulated depreciation Fixtures at cost Less Accumulated depreciation

6,300 (1,302 ) 1,040 (96 )

$

2,380 864

4,998 944


49

Question 25-7A Workings: AAT 101 Cost Less Estimated residual value Estimated total depreciation

Estimated life: 5 years Depreciation charge per year

1,200

$

Accumulated depreciation at 1.4.20X6 (2 years 6 months × $1,200 p.a.) Depreciation 1.4.20X6 to 30.6.20X6 (3 months × $1,200 p.a.) Depreciation to 30.6.20X6 Cost was Written-down value on disposal Trade-in allowance Loss on disposal

3,000 300 3,300 8,500 5,200 (5,000 ) 200

DJH 202 Cost Less Estimated residual value Estimated total depreciation

$ 12,000 (2,000 ) 10,000

Estimated life: 8 years Depreciation charge per year 1,250 Accumulated depreciation at 1.4.20X6 (2 years × $1,250 p.a.) Remainder of estimated depreciation Adjust to cover 4 years in future: i.e. $7,500 ÷ 4, yearly charge is now

Depreciation for the year to 31 March 20X7 AAT 101 As above DJH 202 As above KGC 303 Cost $15,000 – Residual value $4,000 = $11,000 ÷ 5 years = $2,200 p.a. For 9 months 30.6.20X6 to 31.3.20X7 = $2,200 × 129 (a) (Dates omitted)

2,500 7,500 1,875

$ 300 1,875 1,650 3,825

The Journal

Dr $ Motor vehicles 15,000 Motor vehicle disposals Pinot Finance Bank Purchase of vehicle KGC 303. Motor vehicle disposals 8,500 Motor vehicles Cost of vehicle AAT 101. 50

$ 8,500 (2,500 ) 6,000


Cr $ 5,000 6,000 4,000

8,500

Provision for depreciation: Motor vehicles 3,300 Motor vehicle disposals Depreciation to date of vehicle AAT 101 on disposal. Profit and loss 200 Motor vehicle disposals Loss on disposal of vehicle AAT 101. (b) Profit and loss 3,825 Provision for depreciation: Motor vehicles Depreciation on motor vehicles for the year to 31 March 20X7.

3,300

200

3,825

Motor Vehicles

(c) (Dates omitted)

$ $ Balance b/d 20,500 Motor vehicles disposals 8,500 Purchase of KGC 303 15,000 Balance c/d 27,000 35,500 35,500

Provision for Depreciation: Motor Vehicles

Motor vehicle disposals Balance c/d

$ 3,300 Balance b/d ($3,000 + $2,500) 6,025 Profit and loss 9,325

$ 5,500 3,825 9,325


Machinery Account

20X3 $ 20X3 $ Jan 1 Balance b/f 300,000 Dec 31 Balance c/f 480,000 Mar 1 Bank 180,000 480,000 480,000

(ii)

Motor Vehicles Account

20X3 $ 20X3 $ Jan 1 Balance b/f 206,000 Oct 1 Disposal 120,000 Jul 1 Bank 360,000 Dec 31 Balance c/f 446,000 566,000 566,000

(iii)

Provision for Depreciation on Machinery Account

20X3 $ 20X3 $ Jan 1 Balance c/f 168,000 Jan 1 Balance b/f 72,000 Dec 31 Profit and loss [($300,000 + $180,000) × 20%] 96,000 168,000 168,000


51

Provision for Depreciation on Motor Vehicles Account

(iv)

20X3 $ 20X3 $ Oct 1 Disposal 78,840 Jan 1 Balance b/f 106,000 Dec 31 Balance c/f 152,812 Dec 31 Profit and loss {[($206,000 – $120,000) – ($106,000 – $78,840) + $360,000] × 30%} 125,652 231,652 231,652

Motor Vehicles Disposal Account

(v)

20X3 $ 20X3 Oct 1 Motor vehicles 120,000 Oct 1 Provision for depreciation " 1 Bank " 1 Profit and loss: Loss on disposal 120,000

$ 78,840 15,000 26,160 120,000

(b) The purpose of providing depreciation on fixed assets is to apply the matching principle to fixed assets. The benefits arising from the use of fixed assets are spread over the periods of their useful lives in the business so that the costs incurred in obtaining the fixed assets can be matched against the benefits.

Question 25-12A (a)

Plant and Machinery Account

20X3 Jan 1 Balance b/d Apr 15 Cash Sept 1 Cash Nov 1 Cash

Office Equipment Account

20X3 Jan 1 Balance b/d Mar 1 Cash May 5 Disposal " 5 Cash

$ 20X3 $ 500,000 Aug 1 Plant disposal 120,000 115,000 Dec 31 Balance c/d 860,000 350,000 15,000 980,000 980,000

$ 20X3 $ 180,000 May 5 Disposal 18,000 32,000 Dec 31 Balance c/d 214,000 11,000 9,000 232,000 232,000

Plant and Machinery — Provision for Depreciation Account

20X3 $ 20X3 $ Aug 1 Disposal (W1) 58,560 Jan 1 Balance c/d 95,000 Dec 31 Balance c/d 201,152 Dec 31 Profit and loss 164,712 259,712 259,712

52


Office Equipment — Provision for Depreciation Account

20X3 $ 20X3 $ May 5 Disposal (W2) 3,600 Jan 1 Balance b/d 36,000 Dec 31 Balance c/d 53,800 Dec 31 Profit and loss 21,400 57,400 57,400

Disposal of Plant and Machinery Account

20X3 $ 20X3 $ Aug 1 Plant and machinery 120,000 Aug 1 Provision for depreciation 58,560 " 1 Cash (repairs) 5,000 " 1 Cash 100,000 Dec 31 Profit and loss 33,560 158,560 158,560

Disposal of Office Equipment Account

20X3 $ 20X3 $ May 5 Office equipment 18,000 May 5 Provision for depreciation 3,600 " 5 Office equipment 11,000 " 31 Profit and loss 3,400 18,000 18,000

Repairs and Maintenance Account

20X3 $ 20X3 $ S ept 1 Cash (W3) 8,000 Dec 31 Profit and loss 44,000 Nov 1 Cash (W4) 36,000 44,000 44,000 Workings: (W1) $120,000 × 20% + $120,000 × 80% × 20% + $120,000 × 80% × 80% × 20% = $58,560 (W2) $18,000 × 10% × 2 = $3,600 (W3) $48,000 × 244 = $8,000 (W4) $51,000 – $15,000 = $36,000 (b)

Profit and Loss Account (extract) for the year ended 31 December 20X3

Income: Profit on disposal of plant and machinery

$ 33,560

Expenses: Depreciation — plant and machinery Depreciation — office equipment Loss on disposal of office equipment Repairs and maintenance

164,712 21,400 3,400 44,000

(c) Depreciation is the systematic allocation of the depreciable amount of a fixed asset over its estimated useful life. Depreciation is necessary because of the need to match the revenues of the period with the costs incurred in earning them.


53

Question 25-13A (a) Cost of Machine M003: List price Trade discount Transportation charges Installation and set-up Cost of Machine M004: Drafting and design Construction: Materials and components Direct wages Overheads Installation and testing (b) (i)

$ 585,000 (35,000 ) 12,000 25,000 587,000 $ 50,000 200,000 80,000 120,000 30,000 480,000

Machinery

20X3 $ 20X3 $ Jan 1 Balance b/d 730,000 Jul 1 Disposal of M001 450,000 Jul 1 Purchase of M003 587,000 Dec 31 Balance c/d 1,347,000 Nov 1 Construction of M004 480,000 1,797,000 1,797,000

(ii)

Provision for Depreciation

20X3 $ 20X3 $ Jul 1 Disposal of M001 (W1) 219,600 Jan 1 Balance b/d (W1) 320,400 Dec 31 Balance c/d 374,040 Dec 31 Depreciation (W2) 273,240 593,640 593,640 Workings: (W1) Accumulated depreciation as at 31 December 20X2: 20X0 20X1 20X2 $ $ $ M001 90,000 72,000 57,600 M002 — 56,000 44,800 (W2) Depreciation for the year 20X3: M002 $(280,000 – 100,800) × 20% M003 $587,000 × 20% M004 $480,000 × 25%

54


Total $ 219,600 100,800 320,400 $ 35,840 117,400 120,000 273,240

(iii)

Disposal of Machinery

20X3 $ 20X3 $ Jul 1 Machinery 450,000 Jul 1 Provision for depreciation 219,600 " 1 Profit on disposal 69,600 " 1 Trade-in value 300,000 519,600 519,600

Question 26-2A (a)

Stationery

20X7 $ 20X8 Jul 1 Inventory b/d 60 Jun 30 Profit and loss 20X8 " 30 Inventory c/d Jun 30 Cash and bank 240 300 (b)

498 530

$ 220 191 5,022 370 5,803

Motor Expenses

20X8 $ 20X7 Jun 30 Cash and bank 1,410 Jul 1 Owing b/d " 30 Owing c/d 67 20X8 Jun 30 Profit and loss 1,477 (e)

$ 32

Rent and Rates

20X8 $ 20X7 Jun 30 Cash and bank 5,410 Jul 1 Owing b/d: Rent " 30 Rates owing c/d 393 Rates 20X8 Jun 30 Profit and loss " 30 Rent prepaid c/d 5,803 (d)

300

General Expenses

20X8 $ 20X7 Jun 30 Cash and bank 470 Jul 1 Owing b/d " 30 Owing c/d 60 20X8 Jun 30 Profit and loss 530 (c)

$ 205 95

$ 92 1,385 1,477

Commission Receivable

20X7 $ 20X8 Jul 1 Accrued b/d 50 Jun 30 Cash and bank 20X8 " 30 Accrued c/d Jun 30 Profit and loss 1,132 1,182

$ 1,100 82 1,182


55

Question 26-5A

J Wong Trading and Profit and Loss Account for the year ended 31 March 20X9

$ $ Sales 127,245 Less Returns inwards (3,486 ) Less Cost of goods sold: Opening inventory 7,940 Add Purchases 61,420 Less Returns outwards (1,356 ) 60,064 68,004 Less Closing inventory (6,805 ) Gross profit Add Discounts received Less Expenses: Wages and salaries ($39,200 + $3,500) 42,700 Rent and insurance ($8,870 – $600) 8,270 Carriage outwards 3,210 General office expenses ($319 + $16) 335 Discounts allowed 2,480 Provision for doubtful debts 110 Depreciation: Fixtures and fittings 190 Van 1,400 1,590 Net profit

123,759

(61,199 ) 62,560 62 62,622

(58,695 ) 3,927


$ $ Fixed assets Fixtures and fittings 1,900 Less Accumulated depreciation (190 ) Van 5,600 Less Accumulated depreciation (1,400 ) Current assets Inventory 6,805 Debtors 12,418 Less Provision for doubtful debts (740 ) 11,678 Prepaid expenses 600 Cash in hand 140 19,223 Less Current liabilities Creditors 11,400 Expenses owing ($3,500 + $16) 3,516 Bank overdraft 2,490 (17,406 ) Net current assets

56

$


$

1,710 4,200 5,910

1,817 7,727

Financed by: Capital Balance at 1.4.20X8 Add Net profit Less Drawings

$

25,200 3,927 29,127 (21,400 ) 7,727

Question 26-7A

Lighting and Heating

20X6 Jan 1 Balance b/d Dec 31 Bank (electricity) " 31 Bank (oil) " 31 Owing c/d

$ 20X6 192 Dec 31 Profit and loss 1,300 " 31 Inventory c/d 810 162 2,464

$ 2,259 205

2,464

Insurance

20X6 Jan 1 Balance b/d Dec 31 Bank (fire) " 31 Bank (general)

$ 20X6 1,410 Jun 30 Bank 1,164 Dec 31 Profit and loss 1,464 " 31 Prepaid c/d 4,038

* Prepaid calculated: Fire 5 months — $1,164 × 125 General 7 months — $1,464 × 127

$ 82 2,617 1,339 * 4,038 $ 485 854 1,339

Question 26-8A No set answer. Note: Avoid very technical language as it is for a non-accountant. Keep it fairly brief. (a) ‘Assets’ means the resources possessed by the business, but there is one important qualification to this statement. That is the asset must have cost the business something that can easily be measured in monetary terms. Whilst, therefore, your skill and knowledge may be an ‘asset’ in ordinary everyday language, it cannot be classed as an ‘asset’ in an accounting sense as it did not cost the business anything. (b) The house you live in, we assume, is not used at all for your business. It cannot therefore be included as a business asset. Accordingly the increase in the value is also irrelevant. If the house is owned by the business it would be included as an asset at $30,000 until a proper revaluation takes place. (c) Assets are called fixed assets when they are of long life, are to be used in the business and were not bought with the main purpose of resale. Examples are buildings, machinery, motor vehicles, and fixtures and fittings.


57

On the other hand, assets are called current assets when they represent cash or are primarily for conversion into cash or have a short life. An example of a short-lived asset is that of the inventory of oil held to power the boilers in a factory, as this will be used up in the near future. Other examples of current assets are cash itself, inventories of goods, debtors and bank balances. (d) Some vehicles may have been bought specifically for resale, and are therefore current assets. Other vehicles, such as a breakdown truck, have been bought for use, not resale, and are consequently fixed assets. See definitions in (c) above. (e) The profit in the profit and loss account is calculated by matching up sales for the year with those costs that have been incurred in order to achieve the sales. Some of the costs were paid for in a previous year, some items are still owed for. This means that costs do not mean items paid for in the year. Similarly, a lot of sales will still be owed for — see debtors — so that this does not equal cash received in the year. As many items in the profit and loss account do not equal cash received or paid out, then obviously there is not necessarily any easy comparison between profit and cash and bank balances. (f) No, that is not true. Depreciation represents the part of the cost used up in the year. As equipment may last for several years, only part of the cost will be charged against one year. The remaining value of the equipment is shown in your balance sheet. The total costs will be charged against your profits, but spread over several years. The total costs will only be charged once against the profits.

Question 26-9A

Mr Yousef Trading and Profit and Loss Account for the year ended 31 May 20X6

$ Sales Less Cost of goods sold: Stock, 1 June 20X5 11,927 Add Purchases 82,350 Carriage inwards 2,211 96,488 Less Stock, 31 May 20X6 (13,551 ) Gross profit Less Carriage outwards ($5,144 – $2,211) 2,933 Salaries and wages 26,420 Rent, rates and insurance ($6,622 + $210 – $880) 5,952 Postage and stationery 3,001 Advertising 1,330 Bad debts 877 Provision for doubtful debts 40 Depreciation ($58,000 × 15%) 8,700 Net profit

58


$ 138,078

(82,937 ) 55,141

(49,253 ) 5,888

Balance Sheet as at 31 May 20X6

$ Fixed assets Equipment at cost Less Depreciation to date

$ 58,000 (27,700 )

Current assets Stock 13,551 Debtors 12,120 Less Provision for doubtful debts (170 ) 11,950 Prepayments 880 Bank 1,002 Cash 177 27,560 Less Current liabilities Creditors 6,471 Expenses accrued 210 (6,681 ) Working capital Financed by: Capital Balance at 1 June 20X5 Add Net profit Less Drawings

$

30,300

20,879 51,179

53,091 5,888 58,979 (7,800 ) 51,179

Question 26-12A (a)

Bad Debts Account

20X0 $ 20X0 Jul 8 Mr Chan 1,900 Dec 31 Profit and loss Oct 19 Mr Lee 4,800 6,700 20X1 20X1 May 5 Mr Cheung 7,500 Dec 31 Profit and loss Nov 28 Mr Wong 520 8,020

$ 6,700 6,700 8,020 8,020

Provision for Doubtful Debts Account

20X0 $ 20X0 Dec 31 Balance c/d 6,000 Dec 31 Profit and loss ($120,000 × 5%) 6,000 20X1 20X1 Dec 31 Profit and loss Jan 1 Balance b/d ($6,000 – $180,000 × 2%) 2,400 " 31 Balance c/f 3,600 6,000

$ 6,000 6,000 6,000

6,000


59

Bad Debts Recovered Account

20X1 Dec 31 Profit and loss (b)

$ 20X1 1,900 Mar 5 Mr Chan

$ 1,900

Accountancy Fee Account

20X2 $ 20X2 $ Jun 30 Balance b/f 12,000 Jun 30 Profit and loss ($12,000 × 126 ) 6,000 " 30 Balance c/f 6,000 12,000 12,000

Wages Account

20X2 $ 20X2 $ Jun 30 Balance b/f 50,000 Jun 30 Profit and loss 58,000 " 30 Balance c/f 8,000 58,000 58,000

Rental Income Account

20X2 $ 20X2 $ Jun 30 Profit and loss 240,000 Jun 30 Balance b/f 220,000 " 30 Balance c/f 20,000 240,000 240,000

Question 26-13A (a)

Insurance Account

20X2 $ 20X2 $ ec 31 Balance b/f 10,000 Dec 31 Profit and loss ($10,000 × 123 ) 2,500 D " 31 Balance c/d 7,500 10,000 10,000

Electricity Account

20X2 ec 31 Balance b/f D " 31 Balance c/d

$ 20X2 1,500 Dec 31 Profit and loss 500 2,000

$ 2,000 2,000

Commission Income Account

20X2 $ 20X2 $ Dec 31 Rental income 10,000 Dec 31 Balance b/f 50,000 " 31 Profit and loss 40,000 50,000 50,000

60


Provision for Bad Debts Account

20X2 $ 20X2 $ Dec 31 Balance c/f 10,000 Dec 31 Balance b/f 8,000 " 31 Profit and loss 2,000 10,000 10,000 (b) According to the accruals concept, revenue and expenses are accrued (i.e. recognised as income when earned or costs as incurred, not as money is received or paid). They match with one another so far as their relationship can be established. Revenue and profits dealt with in the profit and loss account are matched with associated costs and expenses for the same period. As part of the insurance premium paid related to 20X3, that part of expense should be recorded in the 20X3 profit and loss account in accordance with the accruals concept. Similarly, although the electricity expense of $500 was unpaid at 31 December 20X2, this should still be recorded in the 20X2 profit and loss account according to the accruals concept.

Question 27-3A (a) FIFO: 15 × $19 = $285 (b) LIFO:

Inventory after each transaction Received Issued $ $ Jan 120 × $16 120 × $16 1,920 Apr 80 × $18 120 × $16 1,920 80 × $18 1,440 3,360 Jun 45 × $16 80 × $18 75 × $16 1,200 125 Oct 150 × $19 75 × $16 1,200 150 × $19 2,850 4,050 Nov 60 × $16 150 × $19 15 × $16 240 210 (c) AVCO: Average cost per No of units Total value Received Issued unit of inventory in inventory of inventory $ $ Jan 120 × $16 16 120 1,920 Apr 80 × $18 16.80 200 3,360 Jun 125 16.80 75 1,260 Oct 150 × $19 18.27 225 4,110 Nov 210 18.27 15 274


61

Question 27-4A

Trading Account for the year ended

Purchases Less Closing inventory Cost of goods sold Gross profit

FIFO $ 6,210 (285 ) 5,925 2,075 8,000

LIFO AVCO (All methods) $ $ $ 6,210 6,210 Sales 125 × $22 2,750 (240 ) (274 ) 210 × $25 5,250 5,970 5,936 2,030 2,064 8,000 8,000

$ 8,000

8,000

Question 27-6A

Cobden Ltd Computation of Stock as at 31 May 20X9

(1) No adjustment needed Q Cost lower than net realisable value (2) Reduction to net realisable value ($200 + $40 – $110) (3) Arithmetic corrected (4) Omitted items (5) Transposition error (6) Goods omitted (7) Hired item not to be included (8) Samples to be excluded (9) Sale or return items reduced to cost ($602 – $418) (10) Goods held simply on sale or return basis Net increase Stock as originally computed

62


Increase $

Decrease $

— — — 130 72 126 2,010 — — 9 638 — — 347 — 63 — 184 — 267 2,720 1,126 1442443 1,594 87,612 89,206

Question 27-7A (a)

Mary Smith Trading and Profit and Loss Account for the 3 months ended 30 November 20X9

FIFO LIFO $ $ $ $ Sales 15,840 15,840 Less Cost of sales (Note 1) (10,408 ) (11,392 ) Gross profit 5,432 4,448 Less Overhead expenses 1,520 1,520 Sales commission (Note 2) 136 111 Depreciation of lawn mower (Note 3) 12 (1,668 ) 14 (1,645 ) Net profit 3,764 2,803 Note 1 (FIFO) Closing stock 10 × $489 4,890 1 × $350 (net realisable value) 350 5,240 Purchases (12 × $384 + 8 × $450 + 16 × $489) Less Taken for business use 384 Closing stock 5,240 Cost of sales (LIFO) Closing stock 10 × $384 3,840 1 × $350 (net realisable value) 350 4,190 Purchases Less Taken for business use 450 Closing stock 4,190 Cost of sales

16,032 (5,624 ) 10,408

16,032 (4,640 ) 11,392

Note 2 Sales commission: FIFO 2 12 % × $5,432 = $135.80, rounded to $136 LIFO 2 12 % × $4,448 = $111.20, rounded to $111 Note 3 Depreciation: FIFO $384 × LIFO $450 ×

1 8 1 8

× 3 months = $12.00 × 3 months = $14.06, rounded to $14

(b) (c)

Mary Smith’s income, 3 months to 31 August 20X9: Salary $3,750 ($1,5000 × 14 ) + Interest $175 ($7,000 × 10% × 14 ) = $3,925 Business profit, 3 months to 30 November 20X9: $3,764 FIFO: Advantage: related to actual movements of goods; therefore closing stock is nearer to actual current price levels. Disadvantage: during inflation profits include holding gains. LIFO: Advantage: cost of sales is nearer to current price levels. Disadvantage: not related to actual movement of goods; therefore stock valuation will not match up to current price levels.


63

Question 28-2A (a)

Cash Book

20X7 $ 20X7 Jun 1 Balance b/d 1,410 Jun 5 L Ho " 7 J Ma 62 " 12 J Leung " 16 T Wong 75 " 16 T Sin " 28 F So 224 " 29 Blister Disco " 30 G Chan 582 " 29 SLM: Standing order " 30 Flynn: Trader’s credit 64 " 30 Bank charges " 30 Balance c/d 2,417 (b)

$ 180 519 41 22 52 43 1,560 2,417

Bank Reconciliation Statement as at 30 June 20X7

Balance in hand per cash book Add unpresented cheque Less Bank lodgement not yet entered on bank statement Balance in hand as per bank statement

$ 1,560 22 1,582 (582 ) 1,000

Question 28-4A (a)

Bank Account

20X1 $ 20X1 $ Oct 31 Wong 6,310 Oct 31 Balance b/d 11,260 " 31 Balance c/d 27,676 " 31 Credit side undercast 1,190 " 31 Cheque dishonoured — Hung Kee 13,200 " 31 Electricity 5,680 " 31 Telephone 2,600 " 31 Overdraft interest 56 33,986 33,986 (b)

Bank Reconciliation Statement as at 31 October 20X1

$ Adjusted bank account balance Add Unpresented cheques # 168122 12,400 # 168126 12,800 # 168130 4,768 Less Cheque paid in but not yet cleared Balance as per bank statement

64


$ 27,676 OD

29,968 2,292 (7,600 ) 5,308 OD

(c) In an imprest system, a fixed amount of money (petty cash float) is set to meet the petty cash expenses for a period, usually two weeks or a month depending on the frequency of transactions and the amount of the petty cash float. At the end of the period, the petty cash fund is reimbursed with the exact amount of disbursements, and is thus made up again to its original fixed amount.

Question 28-5A (a)

Bank Account

20X3 $ 20X3 Sept 30 Balance b/d 512,000 Sept 30 Overdraft interest (1) " 30 Debit side undercast (6) 100,000 " 30 Post-dated cheque (3) " 30 Cheque entered twice (7) 1,520 " 30 Posting error (4) " 30 Cheque dishonoured (5) " 30 Balance c/d 613,520 (b)

$ 750 26,500 9,090 80,000 497,180 613,520

Bank Reconciliation Statement as at 30 September 20X3

Updated bank account balance Add Unpresented cheques (9) Less Cheque deposited but not yet credited (2) Overdraft as per original bank statement Add Bank error in deducting standing payment (8) Overdraft as per adjusted bank statement

$ 497,180 360,500 857,680 (1,200,000 ) (342,320 ) 6,000 (336,320 )

Question 28-7A (a)

Cash at Bank Account

20X2 $ 20X2 $ ec 31 Balance b/f 180,000 Dec 31 Bank charge (2) D 200 " 31 Trade debtors (5) 6,600 " 31 Overdraft interest (4) 1,200 " 31 Trade creditors (7) 500 " 31 Trade debtors (6) 7,500 " 31 Rent (8) 5,000 " 31 Balance c/f 173,200 187,100 187,100 (b)

Bank Reconciliation Statement as at 31 December 20X2

$ Balance as per correct cash book Add Unpresented cheque (1) Less Uncredited cheque (3) 4,200 An error by the bank (9) 1,200 Balance as per bank statement

$ 173,200 1,500 174,700 (5,400 ) 169,300


65

(c) A bank reconciliation statement provides: • verification of the firm’s records with explanation on aspects ‘not yet known’ by the bank, that is, deposits not yet credited and unpresented cheques • verifying the amount recorded as received and paid have been received and paid • checking the time differences between when amounts recorded as received are banked and amounts recorded as paid are withdrawn • updating the firm’s records for aspects ‘not yet known’ by the firm, that is, direct deposits such as interest received, and direct withdrawals such as bank fees and dishonoured cheques • checking for errors in either the firm’s records or the bank’s records (the latter are reported by the bank statement)

Question 29-2A

Sales Ledger Control

$ $ Balance b/d 28,409 Bad debts 342 Sales journal 26,617 Bank 24,293 Bank: Dishonoured cheques 120 Discounts 416 Returns inwards 924 Set-offs against purchases ledger 319 Balance c/d 28,852 55,146 55,146

Question 29-6A

General Journal

Particular Dr $ (1) Purchases ledger control 2,500 Sales ledger control (2) Sales ledger control 1,000 Bank (3) Bad debts ($2,000 × 2) 4,000 Sales ledger control Purchases ledger control (4) Discounts allowed 800 Sales ledger control (5) Sales 3,500 Sales ledger control (6) Purchases ledger control 6,000 Purchases returns (7) Sales ledger control ($5,400 – $4,500) 900 Bank

66


Cr $ 2,500 1,000 2,000 2,000 800 3,500 6,000 900

(b)

Sales Ledger Control Account

$ $ Balance b/f (derived) 39,160 Purchases ledger control: Set off (1) 2,500 Bank: Refund to debtor (2) 1,000 Bad debts (3) 2,000 Bank: Debtor settlement overstated (7) 900 Discounts allowed (4) 800 Sales (5) 3,500 Balance c/f 32,260 41,060 41,060

Corrected List of Debtors’ Balances

$ Balance b/f Add Incorrect posting to a debtor (7) Less Purchases ledger: Set off (1) 2,500 Refund to a debtor omitted (2) 1,000 Corrected sales ledger balance (c)

$ 34,860 900 35,760 (3,500 ) 32,260

Purchases Ledger Control Account

$ $ Sales ledger control: Set off (1) 2,500 Balance b/f (derived) 22,860 Purchases returns undercast (6) 6,000 Bad debt error (3) 2,000 Balance c/f 16,360 24,860 24,860

Corrected List of Creditors’ Balances

Balance b/f Less Sales ledger: Set off (1) Corrected purchases ledger balance

$ 18,860 (2,500 ) 16,360

Question 29-8A (a)

Journal Entries

Dr $ (1) Sales ledger control account 1,800 Sales account (2) Returns inward account ($1,960 – $690) 1,270 Sales ledger control account (3) Discounts allowed account ($2,100 × 2) 4,200 Sales ledger control account (4) No entry is required. (5) No entry is required. (6) No entry is required.

Cr $ 1,800 1,270 4,200


67

Dr $ (7) No entry is required. (8) No entry is required. (9) Purchases ledger control account 3,160 Sales ledger control account (10) No entry is required. (11) Bad debts account 5,125 Sales ledger control account (b)

3,160

5,125

List of Sales Ledger Balances as at 31 October 20X4

$ Original balance b/f Add (5) Error in posting to wrong side ($4,000 × 2) 8,000 (7) Error for a debit balance treated as a credit balance ($500 × 2) 1,000 (8) Omission of a customer’s balance 5,000 Less (4) Error in sales amount ($4,360 – $3,460) 900 (6) Error in casting 200 (10) Error in posting of a debtor’s settlement 4,800 (c)

Cr $

$ 200,000

14,000 214,000

(5,900 ) 208,100

Sales Ledger Control Account

20X4 $ 20X4 $ Oct 31 Original balance (balancing figure) 220,055 Oct 31 Returns inward (2) 1,270 " 31 Sales (1) 1,800 " 31 Discounts allowed (3) 4,200 " 31 Purchases ledger control set off (9) 3,160 " 31 Bad debts (11) 5,125 " 31 Revised balance 208,100 221,855 221,855

Question 30-3A $ (a) B Wong Dr 1,410 : A Wang Cr (b) Cash Dr 94 : Bank Cr (c) D Fung Dr 734 : D Fong Cr (d) L Hong Dr 72 : Purchases Cr (e) G Tai Dr 128 : Cash Cr (Needs double the amount to cancel out the error and replace it with the correct amount.) (f) Sales Dr 320 : Fittings Cr (g) Cash Dr 400 : Bank Cr (Needs double the amount.) (h) Purchases Dr 1,182 : Fixtures Cr

68


$ 1,410 94 734 72 128 320 400 1,182

Question 30-5A (a) Commissions received Dr (b) Bank charges Dr (c) Motor expenses Dr (d) Fax machine Dr (e) Returns inwards Dr (f) Capital Dr (g) Loan interest Dr (h) Drawings Dr (Needs double the amount.)

$ 430 : Rent received Cr 34 : Rates Cr 37 : Bank Cr 242 : Purchases Cr 216 : Returns outwards Cr 2,000 : Loan: G Ho Cr 400 : Van Cr 168 : Purchases Cr

$ 430 34 37 242 216 2,000 400 168

Question 30-6A (a)

Thomas Smith Corrected Trial Balance as at 31 March 20X8

Dr $ Stock in trade, 1.4.20X7 10,700 Discounts allowed 310 Discounts received Provision for doubtful debts Purchases 94,000 Purchases returns Sales Sales returns 1,100 Freehold property: At cost 70,000 Provision for depreciation Motor vehicles: At cost 15,000 Provision for depreciation Capital: Thomas Smith Bank 7,100 Trade debtors 11,300 Trade creditors Establishment and administrative expenditure 16,600 Drawings 9,000 235,110

Cr $

450 960 1,400 132,100

3,500 4,500 84,600

7,600

235,110


69

(b) (Dates omitted)

The Journal

Dr $ Stock 1,300 Capital Being adjustment for items on mislaid stock lists. Trade creditors 210 Purchases returns Being goods returned to J Hardwell Ltd. Sales 1,000 Trade debtors Being reversal of trade samples sent to John Grey wrongly treated as a sale. Trade samples 1,000 Purchases Being correction of treatment of trade samples. Repairs and renewals 150 Purchases Being correction of treatment of paint used to paint stockroom wrongly charged to purchases.

Cr $ 1,300

210

1,000

1,000

150

Question 31-2A (a) (Narratives omitted)

The Journal

Dr $ (1) Sales 125 Office equipment (2) Suspense 10 Purchases (3) Drawings 140 Purchases (4) Bank charges 22 Suspense (5) Suspense 90 K Lam

70

(b)

Suspense

Purchases K Lam

$ 10 Balance 90 Bank charges 100


Cr $ 125 10 140 22 90

$ 78 22 100

(c)

Statement of Corrected Net Profit for the year ended 31 December 20X7

$ Net profit per the financial statements Add Purchases overcast 10 Private purchase 140 Less Sales shown in error 125 Bank charges omitted 22 Corrected net profit

$ 28,400 150 28,550 (147 ) 28,403

Question 31-5A (a)

Hang Fook Company General Journal

Particular Dr $ (1) Returns outwards 2,500 Returns inwards 2,500 Suspense Adjustment for returns inwards wrongly credited to returns outwards account. (2) Repairs and maintenance 5,250 Plant and machinery Adjustment for repairs and maintenance expense wrongly treated as cost to plant and machinery. Provision for depreciation — plant and machinery 1,050 Depreciation expense — plant and machinery Adjustment for depreciation expense wrongly provided ($5,250 × 20%). (3) Suspense 3,640 Wong Hung Company Adjustment for incorrect posting to personal account ($6,260 – $2,620). (4) Bank interest 2,800 Suspense Adjustment for failure to post overdraft interest to the bank interest account. (5) Suspense 16,320 Discounts received Discounts allowed Adjustment for discounts received wrongly debited to the discounts allowed account. (6) Suspense 5,000 Sales Adjustment for undercast in the sales day book.

Cr $

5,000

5,250

1,050

3,640

2,800

8,200 8,120

5,000


71

(b)

Suspense Account

$ $ Wong Hung company (3) 3,640 Balance per trial balance 17,160 Discounts received (5) 8,200 Returns outwards (1) 2,500 Discounts allowed (5) 8,120 Returns inwards (1) 2,500 Sales (6) 5,000 Bank interest (4) 2,800 24,960 24,960 (c)

Statement for the Correction of Net Profit for the year ended 31 March 20X4

$ Net profit before correction Add Depreciation expense over-provided (2) 1,050 Discounts allowed overstated (5) 8,120 Discounts received understated (5) 8,200 Sales day book undercast (6) 5,000 Less Returns inwards wrongly recorded as returns outwards (1) 5,000 Repairs and maintenance for plant and machinery (2) 5,250 Bank interest omitted (4) 2,800 Corrected net profit for the year

$ 235,000

22,370 257,370

(13,050 ) 244,320

Question 31-6A (a)

Journal

Particulars Dr $ (1) Sales (profit and loss account) 28,000 Provision for depreciation — plant and machinery 38,000 Loss on disposal (profit and loss account) 2,000 Plant and machinery Adjustment for disposal of old plant and machinery wrongly treated as sales. (2) Trading account (profit and loss account) 1,360 Inventories Adjustment for overcast of closing inventory sheet ($1,700 – $170 × 2). (3) Provision for doubtful debts 1,335 Decrease in provision for doubtful debts (profit and loss account) Adjustment for decrease in provision for doubtful debts ($5,775 – $148,000 × 3%) omitted. (4) Sales (profit and loss account) 1,000 Purchases (profit and loss account) 1,000 Suspense Adjustment for cash purchase wrongly credited to the sales account.

72


Cr $

68,000

1,360

1,335

2,000

Dr $ (5) Suspense 2,000 Returns inwards (profit and loss account) Adjustment for overcast in returns inwards day book. (6) Discounts allowed (profit and loss account) 500 Accounts receivable Adjustment for understatement of discounts allowed to customer ($25,000 × 2%). (b)

Cr $ 2,000

500

Statement for the Correction of Net Profit for the year ended 31 November 20X2

$ Net profit before correction Add Decrease in provision for doubtful debts (3) 1,335 Overcast in returns inwards day book (5) 2,000 Less Disposal of plant and machinery wrongly treated as sales (1) 28,000 Loss on disposal of plant and machinery (1) 2,000 Overcast of closing inventory sheets (2) 1,360 Cash purchase wrongly credited to the sales account (4) 2,000 Discounts allowed understated (6) 500 Corrected net profit for the year

$ 126,800 3,335 130,135

(33,860 ) 96,275

(c) Errors of omission — where both the debit and credit entries of a transaction are omitted from the books. Errors of commission — where the correct amount is entered in the wrong, but same class of, account. Errors of principle — where the correct account is entered, but in the wrong class of account. Errors of compensation — where the errors on one side of the ledger are compensated by errors of the same amount on the other side. Errors of original entry — where the incorrect amounts are entered on the correct side of the correct accounts. Reversal of entries — where the correct amounts are entered on the wrong side of the accounts concerned.

(Any four)

Question 32-2A (a)

R Cheng Trading and Profit and Loss Account for the year ended 31 March 20X5

$ Sales (iv) Less Cost of goods sold: Inventory, 1 April 20X4 14,000 Add Purchases 82,000 96,000 Less Inventory, 31 March 20X5 (i) (20,000 ) (ii) Gross profit (iii) Less Expenses (vi) Net profit (v)

$ 106,400

(76,000 ) 30,400 (21,888 ) 8,512

The closing inventory as at 31 March 20X5, as shown above, is $20,000. Frank Wood’s Business Accounting 1 Solutions Manual Hong Kong Edition Third Edition © Pearson Education Limited 2006

73

Order of solving problem: (i) Average inventory is $17,000. Therefore $14,0002 + (a) = $17,000 Therefore (a) = $20,000. (ii) can now be found by deducting (a) $20,000 from $96,000 = $76,000. (iii) is 40% of (ii), therefore (iii) is $30,400. (iv) is therefore needed to balance the account, i.e. $106,400. (v) if net profit was 8% of sales, it would be $8,512. (vi) therefore expenses are $30,400 – (v) $8,512 = $21,888. (b) The total amount of profit and loss expenditure Cheng must not exceed if she is to maintain a net profit on sales of 8% is, as shown in step (vi), $21,888.

Question 32-4A (a) Cost of goods sold = Sales less trade discount

Category X $9,000 – 15% × $9,000 = $7,650

Category Y $24,000 – 18% × $24,000 = $19,680

(b) Sales – Cost of goods sold = Gross profit

$9,000 – $7,650 = $1,350

$24,000 – $19,680 = $4,320

(c) Total expenses = 14% of Sales

$1,260

$3,360

(d) Gross profit – Expenses = Net profit

$1,350 – $1,260 = $90

$4,320 – $3,360 = $960

of goods sold (e) Cost = Inventory turnover Average inventory So, average inventory, by arithmetical deduction

$7,650 ?

$19,680 ?

= 10 = $765

= 16 = $1,230

Question 32-6A (a) Bank transactions $ Opening balance Add Receipts (11 × $81 + 8 × $72) Less Payments: Rent 60 Advertising 66 Miscellaneous 12 Drawings 150 (b) Closing inventory A: (3 + 12 – 11) ⇒ 4 × $54 = B: (3 + 10 – 8) ⇒ 5 × $48 = Au is correct.

74


$ 216 240 456

$ 3,063 1,467 4,530

(288 ) 4,242

(c) Gross profit A : ($81 – $54) × 11 = B : ($72 – $48) × 8 =

$ 297 192 489 = 33.33%

Net profit $489 – ($60 + $66 + $12) =

$ 351 = $23.9%

(d)

Arthur Au Trading and Profit and Loss Account for the month of October

$ Sales (11 × $81) + (8 × $72) Opening inventory 306 Add Purchases 1,128 1,434 Less Closing inventory (456 ) Gross profit Less Expenses: Rent 60 Advertising 66 Miscellaneous 12 Net profit

$ 1,467

(978 ) 489

(138 ) 351

Balance Sheet as at 31 October

Current assets Inventory Bank Less Current liabilities Rong

$

$

(1,128 )

3,570

Capital account Opening balance Add Net profit Less Drawings

3,369 351 3,720 (150 )

3,570

456 4,242 4,698

(e) Profit of $351 Drawings Increase in inventory Increase in bank Increase in creditors

$ 150 150 1,179 (1,128 ) 351


75

Question 32-7A (a)

Mr Lai Trading and Profit and Loss Account for the year ended 31 March 20X2

$ Sales ($31,250 × 12 ÷ 3) Less Cost of goods sold: Opening stock 30,000 Add Purchases 52,500 82,500 Less Closing stock $(28,125 × 2 – 31,250 – 5,000) (20,000 ) Gross profit Less Operating expenses Net profit ($125,000 × 20%)

$ 125,000

(62,500 ) 62,500 (37,500 ) 25,000


$ $ Fixed assets ($125,000 ÷ 4)

$ 31,250

Current assets Stock $(28,125 × 2 – 31,250 – 5,000) 20,000 Debtors 31,250 Cash in hand 5,000 56,250 Less Current liabilities Creditors ($52,500 ÷ 12 × 2) 8,750 Bills payable 19,375 (28,125 ) Net current assets

28,125 59,375

Financed by: Capital Add Profit for the year Less Drawings

50,000 25,000 75,000 (15,625 ) 59,375

(b) Limitations of ratio analysis Difference in nature of business First, it is impossible to compare two companies which are engaged in completely different businesses sensibly. For example, to compare a retailer’s figures with those of a manufacturer would be rather pointless. Difference in accounting policies Also, different businesses may adopt different accounting policies in preparation of their accounts. This increases the difficulty in comparing the businesses. Qualitative features of a business Past accounts do not disclose many useful factors. The desire to keep to the money measurement concept, and the desire to be objective, a great deal of desirable information such as the quality of staff, future plans of the business and its position as compared with that of its competitors, etc. is excluded.

76


Lack of a standard form Ratios are not always defined in a standard form. They are not directly comparable if different formulae are used for calculation of ratios.

Question 32-8A (a)

Peter Ltd Trading and Profit and Loss Account for the year ended 31 March 20X4

$ Sales Less Cost of goods sold: Opening stock 1,553,664 Purchases 4,527,936 6,081,600 Less Closing stock (2,263,968 ) Gross profit ($8,299,200 × 54%) Less Operating expenses Net profit

$ 8,299,200

(3,817,632 ) 4,481,568 (2,987,712 ) 1,493,856

Peter Ltd Balance Sheet as at 31 March 20X4

$ Fixed assets Current assets Stocks 2,263,968 Debtors 642,824 Cash in hand 1,809,808 4,716,600 Less Current liability Creditors (1,886,640 ) Net current assets Less Long-term liability 8% bank loan Capital and reserves Ordinary share capital Retained profit Workings: (1) $5,596,360 – Bank loan = Ordinary share capital + $1,493,856 (2) Bank loan = 25% (ordinary share capital + $1,493,856)

$ 2,766,400

2,829,960 5,596,360 (1,119,272 ) 4,477,088 2,983,232 1,493,856 4,477,088

After solving (1) and (2), 8% bank loan = $1,119,272 and ordinary share capital = $2,983,232.


77

(b) Calculation of the ratios (i) Net profit ratio = Net profit ÷ Sales = $1,493,856 ÷ $8,299,200 = 18% (ii) Acid test ratio = (Current assets – Stock) ÷ Current liabilities = ($4,716,600 – $2,263,968) ÷ $1,886,640 = 1.3 : 1 (iii) Stock turnover ratio = Cost of goods sold ÷ Average stock = $3,817,632 ÷ [($1,553,664 + $2,263,968) ÷ 2] = 2 times (c) Limitations of ratio analysis Difference in nature of business First, it is impossible to compare sensibly two businesses which are completely unlike one another. To compare a supermarket’s ratios with those of a chemical factory would be pointless. Difference in accounting policies Different businesses may adopt different accounting policies in the preparation of their accounts. This increases the difficulty in comparing the businesses sensibly. Qualitative features of a business Certain useful information is not disclosed in the accounts. The desire to keep to the money measurement concept and the desire to be objective exclude a great deal of desirable information such as the quality of staff, the future plans of the business and its position compared with its competitors, etc., from ratio analysis. Lack of a standard form Ratios are not always defined in a standard form. They are not directly comparable if different formulae are used in calculating ratios. (Any three points)

Question 33-2A

Opening Capital as at 31 October 20X3

$ Cash 210 Bank 4,700 Fixtures 2,800 Inventory 18,200 Debtors 26,600 Van 6,800 Less Creditors

78


$

59,310 (12,700 ) 46,610

B Wong Statement of Affairs as at 31 October 20X4

$ $ Fixed assets Van 6,800 Less Accumulated depreciation (1,360 ) Fixtures 3,700 Less Accumulated depreciation (370 ) Current assets Inventory 23,900 Debtors 29,400 Prepaid expenses 460 Cash 190 53,950 Less Current liabilities Trade creditors 9,100 Expenses owing 320 Bank overdraft 1,810 (11,230 ) Net current assets Financed by: Capital Balance at 31 October 20X3 Add Net profit (C) Cash introduced (B) Less Drawings (A)

$

5,440 3,330 8,770

42,720 51,490

44,610 ? 7,600 ? (32,200 ) ?

Missing figures deduced: (A) $51,490, (B) $83,690, (C) $31,480.

Question 33-4A Workings: Cash Bank Cash $ $ $ Balances b/d 194 920 Cash Receipts from debtors 94,200 Trade creditors 1,310 Cash sales 1,540 Rent Loan from F Tung 2,500 Insurance Bank 12,600 Drawings* ? Sundry expenses 180 Balances c/d 272 14,334 97,620 14,334

Bank $ 12,600 63,400 3,200 1,900 11,400 820 4,300 97,620

* Figure for drawings is what is needed to make the cash columns balance, i.e. $12,572.


79

Capital at 31 December 20X7 Bank Cash Inventory Debtors Prepaid insurance Van Less Creditors

Purchases

$ 920 Bank 194 Cash 24,200 9,200 – Opening creditors 340 5,500 + Closing creditors 40,354 (7,300 ) 33,054

Sales

$ 63,400 Bank 1,310 Cash 64,710 (7,300 ) – Opening debtors 57,410 8,100 + Closing debtors 65,510

$ 94,200 1,540 95,740 (9,200 ) 86,540 11,400 97,940

A Wong Trading and Profit and Loss Account for the year ended 31 December 20X8

$ Sales Less Cost of goods sold: Opening inventory 24,200 Add Purchases 65,510 89,710 Less Closing inventory (27,100 ) Gross profit Less Expenses: Rent ($3,200 + $360) 3,560 Insurance ($1,900 + $340 – $400) 1,840 Sundry expenses ($820 + $180) 1,000 Depreciation: Van ($5,500 – $4,600) 900 Net profit

(62,610 ) 35,330

(7,300 ) 28,030

Balance Sheet as at 31 December 20X8

$ Fixed assets Van Less Accumulated depreciation

80

$ 97,940

$

$

5,500 (900 )

4,600

Current assets Inventory 27,100 Debtors 11,400 Prepaid insurance 400 Bank 4,300 Cash 272 43,472 Less Current liabilities Trade creditors 8,100 Rent owing 360 (8,460 )

35,012 39,612


Financed by: Capital Balance at 1 January 20X8 Add Net profit Less Drawings ($12,572 + $11,400) Loan: F Tung

$

33,054 28,030 61,084 (23,972 ) 37,112 2,500 39,612

Question 33-6A

Jean Smith Trading and Profit and Loss Account for the year ended 31 March 20X6

$ Sales [($25,500 – $600) × 2 + $600] Less Cost of sales: Purchases ($26,400 + $120 + $880) 27,400 Less Closing stock (1,900 ) Gross profit 50% × ($50,400 – $600) Less Expenses: Wages 14,700 Rent ($3,500 – $700) 2,800 Rates 1,200 Electricity ($760 + $180) 940 Postage, stationery and sundries 355 Van running expenses 890 Van licence and insurance ($250 – $125) 125 Van depreciation [($7,600 – $100) × 20% × 12 ] 750 Loan interest ($10,000 × 5% × 14 ) 125 Net profit

$ 50,400

(25,500 ) 24,900

(21,885 ) 3,015


Fixed assets Van at cost Less Provision for depreciation

$ 7,600 (750 )

Current assets Stock Debtors Prepayments ($125 + $700) Bank (W1) Cash

1,900 2,300 825 4,310 640 9,975

$

6,850


81

$ $ Less Current liabilities Creditors 880 Accrued expenses ($125 + $180) 305 (1,185 ) Working capital Less Loan: J Peacock

$

8,790 15,640 (10,000 ) 5,640

Capital Balance as at 1 April 20X5 Add Net profit Less Drawings ($3,875 (W1) + $8,500)

15,000 3,015 18,015 (12,375 ) 5,640

Working: (W1) Cash Bank Cash Bank $ $ $ $ Capital 15,000 Van running expenses 890 Loan: J Peacock 10,000 Van licence and insurance 250 Bankings ($42,000 + $340) 42,340 Van 7,600 Cash sales ($50,400 – $2,300) 48,100 Caravan 8,500 Wages 14,700 Rates 1,200 Rent 3,500 Electricity 760 Purchases ($26,400 + $120) 26,520 Postage, etc 355 Bankings 42,340 Drawings (difference) 3,875 Balances c/d 640 4,310 48,100 67,340 48,100 67,340

Question 33-8A (a) Calculation of capital as at 31 December 20X0 Total assets Less Total liabilities Less Income from wife’s investment [(5% + 11%) × 100,000 × $0.5] Capital as at 31 December 20X0

82


$ 735,500 (249,500 ) 486,000 (8,000 ) 478,000

(b)

Chan Lok Man Trading and Profit and Loss Account for the year ended 31 December 20X1

$ Sales (W1) Less Cost of goods sold: Opening inventory 125,000 Add Purchases (W2) 1,072,000 1,197,000 Less Closing inventory (157,000 ) Gross profit Add Discounts received Less Operating expenses: Salaries and wages 70,000 Electricity 15,000 General expenses (W4) 20,500 Motor vehicle expenses 42,000 Depreciation on motor vehicle 33,000 Depreciation on fixtures and fittings 12,000 11,000 Interest on loan Net profit (c)

$ 1,292,000

(1,040,000 ) 252,000 11,000 263,000

(203,500 ) 59,500


$ Fixed assets Motor vehicle ($165,000 – $33,000) Furniture and fittings ($120,000 – $12,000)

$

$

132,000 108,000

240,000

Current assets Inventory 157,000 Trade debtors 110,000 Cash at bank (W5) 219,500 Cash in hand (W5) 48,000 534,500 Less Current liabilities Creditors 193,000 Accrued expenses ($11,000 + $10,000) 21,000 (214,000 ) Net current assets

320,500 560,500

Capital as at 1 January 20X1 Add Net profit for the year Less Drawings Add Long-term liabilities Loan Workings: (W1) Sales = [($1,040,000 – $64,000) × 125% + ($64,000 × 112.5%)] = $1,220,000 + $72,000 = $1,292,000

478,000 59,500 537,500 (77,000 ) 460,500 100,000 560,500


83

Creditors

(W2) Bank Discounts received Balance c/d

$ $ 748,000 Balance b/d 145,000 11,000 Purchases 807,000 193,000 952,000 952,000

Total purchases = Credit purchases + Cash purchases = $807,000 + $265,000 = $1,072,000 (W3)

Debtors

$ $ Balance b/d 236,500 Cash 1,418,500 Sales 1,292,000 Balance c/d 110,000 1,528,500 1,528,500 (W4)

General Expenses

$ $ Bank 22,300 Balance b/d 4,500 Cash 2,700 Profit and loss account 20,500 25,000 25,000 (W5)

Cash Book

Cash Bank Cash $ $ $ Balance b/d 34,000 55,000 Income from wife’s investment Receipts from debtors (W3) 1,418,500 1,385,000 Purchases Drawings Payment to creditors Salaries and wages 15,000 Electricity Motor vehicle expenses 1,800 General expenses 2,700 Receipts from trade debtors banked 1,385,000 Balance c/d 48,000 1,452,500 1,440,000 1,452,500

84


Bank $ 8,000 265,000 77,000 748,000 45,000 15,000 40,200 22,300

219,500 1,440,000

Question 33-12A (a)

P Mak Capital Account on 1 January 20X8

$ Bank Cash Inventory Machinery Debtors Less Accruals 150 Creditors 5,700 Bank loan 7,000 (b)

$ 6,000 60 2,300 9,800 8,100 26,260

(12,850 ) 13,410

P Mak Trading and Profit and Loss Account for the year ended 31 December 20X8

$ $ Sales Less Sales returns Less Cost of sales: Opening inventory at 1 January 20X8 2,300 Add Purchases 30,700 33,000 Less Withdrawal by the owner 1,200 Closing inventory at 31 December 20X8 5,400 (6,600 ) Gross profit Add Discounts received Less Expenses: Rent 850 Bad debts written off 240 Wages 9,200 Insurance 850 Loan interest 700 Depreciation 2,800 Repairs 1,400 Electricity 570 Net profit

$ 47,700 (640 ) 47,060

(26,400 ) 20,660 600 21,260

(16,610 ) 4,650

Workings: Sales: $(35,000 – 80 + 9,700 + 240 – 8,100 + 9,200 + 640 + 1,100) = $47,700. Purchases: $(31,000 – 5,700 + 4,800 + 600) = $30,700. Depreciation: $(9,800 + 3,400 – 10,400) = $2,800.


85

Question 33-13A

P Mak Balance Sheet as at 31 December 20X8

$ Fixed assets Machinery at 1 January 20X8 Add Additions Less Accumulated depreciation

$

$

9,800 3,400 13,200 (2,800 )

10,400

Current assets Inventory 5,400 Debtors 9,200 Prepayments 100 Cash 90 14,790 Current liabilities Creditors 4,800 Bank overdraft 2,930 Accrued charges: Loan interest ($700 – $500) 200 (7,930 )

6,860 17,260

Capital account Balance at 1 January 20X8 Add Net profit Less Drawings ($1,200 + $6,600)

10,260

13,410 4,650 18,060 (7,800 )

10% bank loan

7,000 17,260

Question 34-2A (a)

The Shire Golf Club Bar Trading Account for the year ended 31 December 20X3

$ Bar sales Less Cost of goods sold: Opening inventories 9,400 Add Purchases 41,300 50,700 Less Closing inventories (6,410 ) Gross profit Wages of bar staff Profit to income and expenditure

86


$ 84,600

(44,290 ) 40,310 (29,200 ) 11,110

(b)

Income and Expenditure Account for the year ended 31 December 20X3

$ Income Subscriptions ($183,400 – $1,870) Profit on bar trading Profits from raffles Less Expenditure: Golf professional’s salary 37,000 Greenkeeper’s wages 21,500 General expenses 910 Depreciation of equipment 2,400 Surplus of income over expenditure

$ 181,530 11,110 6,508 199,148

(61,810 ) 137,338


$ Fixed assets Clubhouse Equipment 18,600 Less Accumulated depreciation (2,400 ) Current assets Bar inventories 6,410 Bank 3,924 10,334 Less Current liabilities Subscriptions received in advance (1,870 ) Financed by: Accumulated fund Balance at 1 January 20X3 Add Surplus of income over expenditure

$ 142,000 16,200 158,200

8,464 166,664

29,326 137,338 166,664

Question 34-3A (a)

City Leisure Centre Refreshment Trading Account for the year ended 31 December 20X4

$ Refreshment takings Less Cost of supplies: Opening inventories 680 Add Purchases 4,320 5,000 Less Closing inventories (920 ) Gross profit Wages Profit to income and expenditure

$ 16,290

(4,080 ) 12,210 (4,680 ) 7,530


87

(b) Accumulated fund as at 1 January 20X4: Equipment $32,400 + Inventory $680 + Bank $3,900 = $36,980. (c)

Income and Expenditure Account for the year ended 31 December 20X4

$ Income Subscriptions ($45,060 + $860) Refreshment bar profit Profits from dances Profit on exhibition Less Expenditure: Wages ($31,400 – $4,680) 26,720 Rent of rooms 8,700 Travelling expenses of teams 1,900 Depreciation of equipment 5,200 Loss on equipment sold 80 Surplus of income over expenditure

$ 45,920 7,530 4,116 890 58,456

(42,600 ) 15,856


Fixed assets Equipment ($32,400 – $420 + $18,200) Less Accumulated depreciation

$ 50,180 (5,200 )

Current assets Refreshment bar inventories 920 Subscriptions owing 860 Bank 6,076 Financed by: Accumulated fund Balance at 1 January 20X4 Add Surplus for the year

$

44,980

7,856 52,836

36,980 15,856 52,836

Question 34-5A (a)

Kong Hong Golf Club Bar Trading Account for the year ended 31 December 20X2

$ Bar takings Less Cost of goods sold: Opening stock 12,000 Add Purchases 38,500 50,500 Less Closing stock (9,500 ) Gross profit Less Wages Net profit from bar trading 88


$ 90,800

(41,000 ) 49,800 (45,000 ) 4,800

(b)

Kong Hong Golf Club Income and Expenditure Account for the year ended 31 December 20X2

$ Income: Net profit from bar trading 4,800 Subscriptions ($253,700 + $4,000 – $10,000 + $8,000 – $5,500) 250,200 Donations 21,000 Bank interest 850 Expenditure: Office rent ($168,000 + $20,000 – $18,000) 170,000 Repairs to club house 2,000 Loss on disposal of office equipment ($3,000 – $4,400) 1,400 General expenses ($80,500 – $8,800 + $7,500) 79,200 Depreciation — office equipment ($85,600 – $4,400) × 20% 16,240 Surplus for the year (c)

$

276,850

(268,840 ) 8,010

Kong Hong Golf Club Balance Sheet as at 31 December 20X2

$ $ Fixed assets Office equipment, at net book value ($85,600 – $4,400 – $16,240)

$ 64,960

Current assets Stock 9,500 Subscription in arrears 8,000 Office rent prepaid 18,000 Bank 48,650 84,150 Less Current liabilities Bar creditors ($38,500 + $14,000 – $42,500) 10,000 Subscription received in advance 5,500 General expenses accrued 7,500 (23,000 ) Net current assets 61,150 126,110 Accumulated fund As at 1 January 20X2 ($85,600 + $12,000 + $10,000 + $20,000 + $17,300 – $14,000 – $4,000 – $8,800) 118,100 Add Surplus for the year 8,010 126,110

Question 34-11A (a)

Subscription Account

Balance (in arrears) b/d Income and expenditure Balance (in advance) c/d

$ 18,000 Balance (in advance) b/d 145,400 Bank 32,000 Balance (in arrears) c/d 195,400

$ 22,000 150,400 23,000 195,400


89

(b)

Bar Trading Account for the year ended 31 December 20X3

$ Sales Less Cost of sales: Opening stock 52,000 Purchases ($100,360 + $79,000 – $110,000) 69,360 121,360 Less Closing stock (45,000 ) Less Bar wages 36,000 Insurance [($24,000 + $9,000 – $2,000) × 20%] 6,200 General expenses [($16,625 + $3,200 – $4,500) × 20%] 3,065 Profit from bar trading (c)

(45,265 ) 94,125

$ 145,400 94,125 28,350 7,050 274,925

(195,130 ) 79,795

Dalmatian Social Club Balance Sheet as at 31 December 20X3

$ Fixed assets Furniture and fixtures, at cost 35,600 Less Provision for depreciation (7,560 ) Motor vehicles, at cost 264,000 Less Provision for depreciation (54,615 ) Current assets Bar stock 45,000 Members’ subscriptions in arrears 23,000 Insurance prepaid 2,000 Cash and bank 20,720 90,720

90

(76,360 ) 139,390

Dalmatian Social Club Income and Expenditure Account for the year ended 31 December 20X3

$ Income: Subscriptions Bar profit Annual ball receipts ($114,350 – $86,000) Donations Expenditure: Insurance [($24,000 + $9,000 – $2,000) × 80%] 24,800 General expenses [($16,625 + $3,200 – $4,500) × 80%] 12,260 Salaries 119,950 Repairs 11,295 Depreciation on furniture and fixtures [($20,000 + $15,600) × 10%] 3,560 Depreciation on motor vehicles [($165,000 + $99,000 – $31,350) × 10%] 23,265 Surplus of income over expenditure (d)

$ 215,750


$

28,040 209,385 237,425

$ Less Current liabilities Bar creditors 79,000 Members’ subscriptions in advance 32,000 Accrued general expenses 3,200 114,200 Net current liabilities Financed by: Accumulated fund at 1 January 20X3 (W1) Surplus of income over expenditure for the year Working: (W1) Accumulated fund at 1 January 20X2: Assets: Furniture and fixtures Provision for depreciation on furniture and fixtures Motor vehicles Provision for depreciation on motor vehicles Bar stock Insurance prepaid Members’ subscriptions in arrears Cash and bank Liabilities: Bar creditors Members’ subscriptions in advance Accrued general expenses

$

(23,480 ) 213,945 134,150 79,795 213,945 $ 20,000 (4,000 ) 165,000 (31,350 ) 52,000 24,000 18,000 27,000 (110,000 ) (22,000 ) (4,500 ) 134,150

Question 35-4A (a) Annual Depreciation Charge (i) Straight line (ii) Diminishing balance (iii) Units of output $ $ 20X1 450 60% × $1,800 1,080 35,000 ÷ 180,000 × $1,800 20X2 450 60% × $720 432 45,000 ÷ 180,000 × $1,800 20X3 450 60% × $288 173 45,000 ÷ 180,000 × $1,800 20X4 450 60% × $115 69 55,000 ÷ 180,000 × $1,800 1,800 1,754 (b) (i) (Dates omitted)

Laser Printer

Balance b/d (ii)

$ 350 450 450 550 1,800

$ 1,800 Assets disposals

$ 1,800

Provision for Depreciation: Laser Printer

$ Assets disposals 1,720 Balance b/d Profit and loss 1,720

$ 1,685 35 1,720


91

(iii)

Laser printer Profit and loss

Assets Disposals $ 1,800 Provision for depreciation 120 Bank 1,920

$ 1,720 200 1,920

Question 35-5A

92

J Jones Ltd Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 20X6

$ $ Inventory of raw materials at 1.1.20X6 Add Purchases Less Inventory of raw materials at 31.12.20X6 Cost of raw materials consumed Factory wages Prime cost Indirect manufacturing costs: Fuel and light [($21,000 + $4,000) × 80%] 20,000 Rent and rates [($21,000 – $5,000) × 75%] 12,000 Repairs to plant and machinery 9,000 Depreciation — plant and machinery ($80,000 × 10%) 8,000 Add Work in progress at 1.1.20X6 Less Work in progress at 31.12.20X6 Production cost of goods completed c/d

$ 21,000 258,000 279,000 (25,000 ) 254,000 59,000 313,000

Sales Less Returns inwards Less Cost of goods sold: Inventory of finished goods at 1.1.20X6 23,000 Add Production cost of goods completed b/d 365,000 388,000 Less Inventory of finished goods at 31.12.20X6 (26,000 ) Gross profit Less Expenses: Administration expenses: Fuel and light [($21,000 + $4,000) × 20%] 5,000 Administrative salaries 17,000 Rent and rates [($21,000 – $5,000) × 25%] 4,000 General office expenses 9,000 35,000 Selling and distribution expenses: Carriage outwards 4,000 Financial charges: Provision for doubtful debts ($20,000 × 5%) 1,000 Net profit

482,000 (7,000 ) 475,000


49,000 362,000 14,000 376,000 (11,000 ) 365,000

(362,000 ) 113,000

(40,000 ) 73,000


$ Fixed assets Freehold premises Plant and machinery 80,000 Less Accumulated depreciation (16,000 )

$

$

410,000 64,000

474,000

Current assets Inventory: Raw materials 25,000 Work in progress 11,000 Finished goods 26,000 62,000 Debtors 20,000 Less Provision for doubtful debts (1,000 ) 19,000 Prepayments 5,000 Bank 11,000 97,000 Less Current liabilities Creditors 37,000 Accrual 4,000 (41,000 )

56,000 530,000

Capital account Opening balance Add Net profit

457,000 73,000 530,000

Question 35-7A (a)

Pure International Limited Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 20X0

$ Opening stock Add Purchases Less Closing stock Raw materials consumed Direct wages Royalties Prime cost Factory overhead expenses: General factory expenses 21,000 Factory canteen costs 8,300 Indirect factory labour ($16,600 – $3,000 – $800) 12,800 Electricity [($6,000 + $500) × 45 ] 5,200 Rent and rates [($6,275 + $600) × 35 ] 4,125

$ 21,000 105,000 126,000 (19,000 ) 107,000 80,000 14,000 201,000

51,425 252,425


93

$ Add Work in progress (1.1.20X0) Less Work in progress (31.12.20X0) Factory cost of goods produced Manufacturing profit (20%) Transfer price of finished goods produced

$ 13,338 265,763 (15,558 ) 250,205 50,041 300,246

Sales Less Cost of goods sold: Finished goods at 1.1.20X0 31,656 Value of goods produced 300,246 331,902 Less Finished goods at 31.12.20X0 (31,860 ) Gross profit on trading Manufacturing profit Less Operating expenses: Rent and rates [($6,275 + $600) × 25 ] 2,750 Electricity [($6,000 + $500) × 15 ] 1,300 General office expenses ($40,126 – $2,100) 38,026 Delivery van expenses ($9,000 + $450) 9,450 Office salaries 27,450 Office maintenance 800 Increase in provision for unrealised profit [($31,860 – $31,656) × 20% ÷ 120%] 34 Net profit for the year

420,000

(300,042 ) 119,958 50,041 169,999

(79,810 ) 90,189

(b) A large company which has several divisions may operate by separating these divisions into profit centres in order to assess the efficiency and effectiveness of the management. The value of goods transferred out of the production department (the factory), at transfer price value, is a cost to the department receiving the goods (the warehouse), and is income to the production department. The managers in each division are evaluated on a profit measure basis. This leads to transfer pricing where the goods are transferred from factory to warehouse at cost plus a mark-up. On the other hand, warehousing may be evaluated on the basis of sales price less the cost plus mark-up.

Question 35-9A (a)

Labrador Handbags Limited Manufacturing Account for the year ended 31 December 20X2

$ Raw materials, 1.1.20X2 Add Purchases 1,270,000 Carriage inwards 10,500 Less Raw materials, 31.12.20X2 Raw materials consumed Direct wages ($762,000 + $7,500) Prime cost

94


$ 121,500 1,280,500 1,402,000 (98,000 ) 1,304,000 769,500 2,073,500

$ Factory overhead expenses: Insurance ($105,000 – $15,000) 90,000 Electricity 120,000 Indirect wages ($162,400 + $5,600) 168,000 Depreciation of plant and machinery [($800,000 × 20%) + ($90,000 × 20% × 4 ÷ 12)] 166,000 Rent and rates 360,000 Add Work in progress, 1.1.20X2 Less Work in progress, 31.12.20X2 Factory cost of goods produced Manufacturing profit ($2,980,000 × 30%) Transfer price of finished goods produced (b)

904,000 2,977,500 24,300 3,001,800 (21,800 ) 2,980,000 894,000 3,874,000

Trading Account for the year ended 31 December 20X2

Imported $ Sales 762,000 Less Cost of goods sold: Finished goods at 1.1.20X2 — Value of goods produced — Purchases 660,000 Carriage inwards 68,000 728,000 Less Finished goods at 31.12.20X2 (62,000 ) 666,000 Gross profit on trading 96,000 (c)

$

Selfproduced $ 4,318,000

Total $ 5,080,000

65,000 3,874,000 — — 3,939,000 (78,000 ) 3,861,000 457,000

(4,527,000 ) 553,000

Profit and Loss Account for the year ended 31 December 20X2

$ Gross profit on trading Manufacturing profit Less Selling and distribution expenses [$600,000 – $3,500 + ($150,000 × 20%) + ($30,000 × 20% × 10 ÷ 12)] 631,500 Administration expenses [$280,000 + ($120,000 × 10%)] 292,000 Increase in provision for unrealised profit [($78,000 – $65,000) × 30 ÷ 130] 3,000 Net profit for the year

$ 553,000 894,000 1,447,000

(926,500 ) 520,500


95

Question 35-10A (a)

Mr Cheung Manufacturing Trading and Profit and Loss Account for the year ended 31 December 20X3

$000 Raw materials Stock as at 1 January 20X3 Add Purchases 50,230 Add Carriage inwards 1,560 Less Purchases return of raw materials (1,869 ) Less Stock as at 31 December 20X3 Manufacturing wages ($4,691,000 + $162,000) Prime cost of production Production overhead: Depreciation on plant and machinery ($14,400,000 × 20%) 2,880 Insurance 456 Rent and rates ($3,510,000 × 12 ) 1,755 Electricity and water ($995,000 × 45 ) 796 Add Work in progress as at 1 January 20X3 Less Work in progress as at 31 December 20X3 Cost of production of finished goods Sales Less Cost of goods sold: Finished goods as at 1 January 20X3 20,720 Cost of production 64,251 84,971 Less Finished goods as at 31 December 20X3 (17,570 ) Gross profit Add Discounts received Less Operating expenses: Discounts allowed 1,157 Insurance ($306,000 – $50,000) 256 Rent and rates ($3,510,000 × 12 ) 1,755 Electricity and water ($995,000 × 15 ) 199 Office salaries 3,520 Bad debts 2,014 Depreciation on office equipment ($1,860,000 × 25%) 465 Net profit

96


$000 15,600

49,921 65,521 (12,740 ) 52,781 4,853 57,634

5,887 63,521 9,350 72,871 (8,620 ) 64,251 95,435

(67,401 ) 28,034 856 28,890

(9,366 ) 19,524

(b)

Mr Cheung Balance Sheet as at 31 December 20X3

$000 $000 Fixed assets Plant and machinery, at cost 14,400 Less Provision for depreciation ($4,050,000 + $2,880,000) (6,930 ) Office equipment, at cost 1,860 Less Provision for depreciation ($600,000 + $465,000) (1,065 ) Current assets Stocks — raw materials 12,740 work in progress 8,620 finished goods 17,570 Debtors 9,960 Prepayment 50 Cash at bank 5,055 53,995 Less Current liabilities Creditors 9,986 Accrued expenses 162 (10,148 ) Net current assets

$000

43,847 52,112

Financed by: Capital Balance as at 1 January 20X3 Add Net profit Less Drawings Balance as at 31 December 20X3

32,804 19,524 52,328 (216 ) 52,112

7,470 795 8,265

Question 35-12A

Trumpet Manufacturing Company Limited Manufacturing, Trading and Profit and Loss Account for the year ended 31 March 20X1

$ Raw materials, 1.4.20X0 Add Purchases 215,000 Carriage inwards 4,800 Less Raw materials, 31.3.20X1 Raw materials consumed Manufacturing wages Prime cost

$ 32,800 219,800 252,600 (38,000 ) 214,600 97,500 312,100


97

$

Factory overheads: Insurance ($3,600 × 34 ) 2,700 Electricity [($12,640 + $4,500) × 35 ] 10,284 Plant maintenance 2,500 Depreciation of plant ($93,000 × 20%) 18,600 Rent and rates [($282,000 – $1,800) × 23 ] 186,800 Add Work-in-progress, 1.4.20X0 Less Work-in-progress, 31.3.20X1 Factory cost of goods produced Manufacturing profit Transfer price of finished goods produced (20,800 × $30) Sales Less Cost of goods sold: Finished goods, 1.4.20X0 18,000 Add Value of goods produced 624,000 642,000 Less Finished goods, 31.3.20X1 (8,640 ) Gross profit on trading Manufacturing profit Provision for unrealised profit written back [($18,000 – $8,640) × $104,000 ÷ $624,000] Less Operating expenses: Carriage outwards 23,000 Audit fee 42,000 Bank charges 1,960 Insurance ($3,600 × 14 ) 900 Loan interest 4,000 Depreciation of office equipment [($128,000 – $25,600) × 20%] 20,480 Office salaries 32,500 Rent and rates [($282,000 – $1,800) × 13 ] 93,400 Electricity [($12,640 + $4,500) × 25 ] 6,856 Provision for doubtful debts 5,120 Net profit before tax Taxation Net profit after tax Less Appropriations: Transfer to general reserve 120,000 Interim ordinary dividend 40,000 Final ordinary dividend ($500,000 × 12%) 60,000 Retained profits for the year

98


$

220,884 532,984 7,142 540,126 (20,126 ) 520,000 104,000 624,000 1,025,960

(633,360 ) 392,600 104,000 1,560 498,160

(230,216 ) 267,944 (44,200 ) 223,744

(220,000 ) 3,744

Question 36-3A

Jack’s Superstores Departmental Trading and Profit and Loss Account for the year ended 31 March 20X5

A B C $ $ $ $ $ $ Sales 180,000 138,000 82,000 Less Cost of goods sold: Opening inventory 27,100 21,410 17,060 Add Purchases 101,300 81,200 62,900 128,400 102,610 79,960 Less Closing inventory (23,590 ) (104,810 ) (15,360 ) (87,250 ) (18,200 ) (61,760 ) Gross profits 75,190 50,750 20,240 Add Discounts received 1,013 812 629 76,203 51,562 20,869 Less Expenses: Salaries and wages 45,600 30,400 15,200 Rent and rates 3,100 3,100 3,100 Delivery expenses 1,620 1,242 738 Commission 4,500 3,450 2,050 Insurance 900 600 300 Advertising 769 769 769 Administrative and general expenses 6,600 6,600 6,600 1,400 (64,489 ) 1,400 (47,561 ) 1,400 (30,157 ) Depreciation Net profits / (losses) 11,714 4,001 (9,288 )

Question 37-3A

J Fung Cash Flow Statement for the year ended 31 December 20X9

$ Cash flows from operating activities Profit before taxation 79,000 Adjustments for: Depreciation ($2,000 + $14,200) 16,200 Operating profit before working capital changes 95,200 Increase in inventories (54,100 ) Increase in trade receivables (11,100 ) Decrease in trade payables (8,600 ) Net cash from operating activities Cash flows from investing activities Payments to acquire tangible fixed assets Cash flows from financing activities Loan received 30,000 Capital introduced 25,000 Drawings (78,000 )

$

21,400 (44,000 )


99

Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January 20X9 Cash and cash equivalents at 31 December 20X9

$ (23,000 ) (45,600 ) 34,500 (11,100 )

Question 37-5A

S Ma Cash Flow Statement for the year ended 31 December 20X8

$ Cash flows from operating activities Profit before taxation 46,770 Adjustment for: Depreciation 5,285 Loss on sale of equipment 560 Operating profit before working capital changes 52,615 Decrease in provision for bad debts (170 ) Increase in inventories (3,035 ) Decrease in trade receivables 1,440 Increase in trade payables 3,010 Net cash from operating activities Cash flows from investing activities Receipts from sale of equipment Cash flows from financing activities Partial repayment of loan from A Woo (11,185 ) Drawings (28,000 ) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 January 20X8 Cash and cash equivalents at 31 December 20X8

$

53,860 4,500

(39,185 ) 19,175 9,050 28,225

Question 37-8A (a)

Multinational Ltd Cash Flow Statement for the year ended 31 December 20X7

Cash flows from operating activities Profit for the year Adjustments for: Depreciation ($2,000 + $6,000 + $6,000) Interest expense Loss on disposal of tangible fixed assets ($1,480 – $860) Operating profit before working capital changes Decrease in inventory Decrease in trade receivables and prepayments Increase in trade payables and accruals ($64,100 – $400 – $41,900) Cash generated from operations Interest paid ($6,000 – $400) 100


$ 50,400 14,000 6,000 620 71,020 15,660 4,900 21,800 113,380 (5,600 )

$

$ Net cash from operating activities Cash flows from investing activities Payments to acquire tangible fixed assets ($72,400 + $39,720) (W1, W3) (112,120 ) Receipts from disposal of tangible fixed assets ($10,860 + $2,540) (W2, W4) 13,400 Purchase of long-term investments (16,000 ) Purchase of short-term investments (2,400 ) Net cash used in investing activities Cash flows from financing activities Drawings (30,260 ) Partial repayment of mortgage loan (6,000 ) Owners’ capital withdrawals (13,000 ) Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January 20X7 Cash and cash equivalents at 31 December 20X7 Notes: Analysis of cash and cash equivalents: Cash and cash equivalents Bank overdraft Workings: (W1)

31 December 20X7 $ 1,400 (56,400 ) (55,000 )

$ 107,780

(117,120 )

(49,260 ) (58,600 ) 3,600 (55,000 )

31 December 20X6 $ 3,600 — 3,600

Equipment

$ $ Balance b/d 35,200 Disposal 10,000 Bank (balancing figure) 72,400 Depreciation 6,000 Balance c/d 91,600 107,600 107,600 (W2)

Disposal of Equipment

$ $ Disposal 10,000 Bank (balancing figure) 10,860 Profit on disposal 860 10,860 10,860 (W3)

Motor Vehicles

$ $ Balance b/d 8,160 Disposal 4,020 Bank (balancing figure) 39,720 Depreciation 6,000 Balance c/d 37,860 47,880 47,880 (W4)

Disposal of Motor Vehicles

$ Disposal 4,020 Loss on disposal Bank (balancing figure) 4,020

$ 1,480 2,540 4,020


101

(b) The profit earned by Multinational Ltd increased from $30,600 in 20X6 to $50,400 in 20X7. Looking at the figures, it appears the company was doing well. However, the level of overdraft rose significantly during the year ended 31 December 20X7. This was due to purchases of equipment and motor vehicles ($112,120), as well as increases in both short-term and long-term investments ($18,400). The increase in the level of bank overdraft would have been even higher but for significant increases in trade payables and accruals, as well as decreases in inventory, trade receivables and prepayments. Working capital fell by $98,960 compared to 20X6. Criticisms can be made in respect of the management of the business. They include: (i) Excessive levels of drawings and capital withdrawals by the owners when funds were needed for the expansion of the business. The net level of drawings and capital withdrawals rose from $16,400 in 20X6 to $43,260 in 20X7 — an increase of $26,860. (ii) The business held substantial short-term and long-term investments while running up a large bank overdraft at the same time. It can significantly improve its cash position by selling off such investments and financing fixed asset purchases with long-term loans. It is not a good practice to finance fixed asset purchases with short-term funds.

Question 37-9A

Hanford Ltd Cash Flow Statement for the year ended 31 December 20X2

$000 Cash flows from operating activities Profit before tax 2,490 Adjustments for: Depreciation 960 Amortisation of goodwill 60 Amortisation of government grant ($900,000 + $150,000 – $780,000) (270 ) Interest expense 90 Loss on sale of plant 150 Release of plant maintenance provision (80 ) Operating profit before working capital changes 3,400 Increase in inventories ($8,260,000 – $6,820,000) (1,440 ) Increase in trade and other receivables ($6,450,000 – $5,260,000) (1,205 ) Increase in provision for bad debts ($240,000 – $160,000) 80 Increase in trade and other payables ($3,625,000 – $3,190,000) 435 Cash generated from operations 1,270 Interest paid ($15,000 + $90,000 – $45,000) (60 ) Profit tax paid ($480,000 + $810,000 – $390,000) (900 ) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (750 ) Receipt of government grant 150 Proceeds from sale of plant (W1) 60 Net cash used in investing activities Cash flows from financing activities Issue of ordinary shares (W2) 1,350 Issue of notes payable ($900,000 – $300,000) 600 Dividends paid* (1,200 )

102


$000

310

(540 )

$ Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 31 December 20X1 ($425,000 – $30,000) Cash and cash equivalents at 31 December 20X2 ($210,000 – $85,000) * This could also be shown as an operating cash flow. Workings: (W1) Property, plant and equipment $000 Balance b/f 5,490 Revaluation surplus 600 Plant acquired 750 Depreciation (960 ) Balance c/f (5,670 ) Sale at net book value 210 Loss on sale (150 ) Sale proceeds 60 (W2) Share capital Ordinary shares b/f Bonus issue 1 for 10 Ordinary shares c/f Issue for cash Increase in share premium ($1,050,000 – $300,000) Proceeds from issue of ordinary shares

$ 750 520 (395 ) 125

$000 (1,500 ) (150 ) 2,250 600 750 1,350

Question 38-2A (a)

Memorandum Joint Venture Account for Fan and Goh

$ $ $ Mowers purchased 135,260 Sales 123,790 Carriage 404 Fan: Mowers taken over 40,000 Net profit: Fan ( 12 ) 14,063 Goh ( 12 ) 14,063 28,126 163,790 163,790 (b) Fan’s books

Joint Venture with Goh

Mowers purchased Carriage Bank: Goh Share of net profit Balance c/d

$ 120,400 Bank: Goh 320 Sales 50,000 Mowers taken over 14,063 29,807 214,590

$ 70,000 104,590 40,000

214,590

Bank: to settle with Goh 29,807 Balance b/d 29,807


103

Goh’s books

Joint Venture with Fan

Mowers purchased Carriage Bank: Fan Share of net profit

$ 14,860 Bank: Fan 84 Sales 70,000 Balance c/d 14,063 99,007

$ 50,000 19,200 29,807 99,007

Balance b/d 29,807 Bank: to settle with Fan 29,807

Question 38-4A (a)

Mr Chan’s Book Joint Venture with Mr Lee Account

20X0 Mar 31 Purchases " 31 Repairing " 31 Delivery charges " 31 Share of profit (b)

Mr Lee’s Book Joint Venture with Mr Chan Account

20X0 Mar 31 Rent " 31 Commission " 31 Sundry expenses " 31 Share of profit Apr 5 Cash paid to Mr Chan (c)

$ 20X0 $ 30,000 Mar 31 Sales 620,000 25,000 " 31 Stock taken over 400 17,000 114,900 433,500 620,400 620,400

Mr Chan and Mr Lee Memorandum Joint Venture Account

20X0 Mar 31 Purchases " 31 Repairing " 31 Delivery charges " 31 Rent " 31 Commission " 31 Sundry expenses " 31 Share of profit: Mr Chan ( 12 ) Mr Lee ( 12 )

104

$ 20X0 $ 300,000 Apr 5 Cash received from Mr Lee 433,500 15,000 3,600 114,900 433,500 433,500

$ 20X0 $ 300,000 Mar 31 Sales 620,000 15,000 " 31 Stock taken over 400 3,600 30,000 25,000 17,000 114,900 114,900 620,400 620,400


Question 38-5A

Memorandum Joint Venture Account for Ren, Ho and Pang

$ $ $ Paintings ($8,000 + $17,000 + $1,700) 26,700 Sales ($31,410 + $4,220 + $2,300) 37,930 Light and heating 86 Sale of van 1,700 Rent 2,100 Paintings taken over 6,200 Van 2,200 Use of Pang’s van 600 General expenses 1,090 Net profit: Ren ( 13 ) 4,351 Ho ( 12 ) 6,527 Pang ( 16 ) 2,176 13,054 45,830 45,830 Ren’s books

Joint Venture with Ho and Pang

$ $ Rent 2,100 Sale of van 1,700 Paintings 17,000 Balance c/d 22,296 General expenses 545 Share of profit to profit and loss 4,351 23,996 23,996 Balance b/d 22,296 Cash received from Pang 22,296 Ho’s books

Joint Venture with Ren and Pang

$ $ Van 2,200 Sales 4,220 Paintings 8,000 Paintings taken over 6,200 Share of profit to profit and loss 6,527 Balance c/d 6,307 16,727 16,727 Balance b/d Pang’s books

6,307 Cash received from Pang

6,307

Joint Venture with Ren and Ho

$ $ Use of van 600 Sales 31,410 Lighting 86 Sales 2,300 Paintings 1,700 General expenses 545 Share of profit to profit and loss 2,176 Balance c/d 28,603 33,710 33,710 Cash paid to Ren 22,296 Balance b/d 28,603 Cash paid to Ho 6,307 28,603 28,603


105

Question 39-2A

Chan, Kwok and Lam Profit and Loss Appropriation Account for the year ended 31 December 20X5

$ $ Net Profit Add Interest on drawings: Chan 1,200 Kwok 900 Lam 500 Less Salaries: Kwok 22,000 Lam 28,000 50,000 Interest on capital: Chan 3,600 Kwok 2,700 Lam 2,100 8,400

$ 184,800

Balance of profit shared: Chan (55%) Kwok (25%) Lam (20%)

70,950 32,250 25,800 129,000

(58,400 ) 129,000

Balance Sheet (extract) as at 31 December 20X5

Capital: Chan Kwok Lam Chan Kwok Lam Current accounts $ $ $ Balances at 1.1.20X5 18,000 8,000 6,000 Add Salaries — 22,000 28,000 Interest on capital 3,600 2,700 2,100 Share of profit 70,950 32,250 25,800 92,550 64,950 61,900 Less Drawings (27,000 ) (23,000 ) (17,000 ) Interest on drawings (1,200 ) (900 ) (500 ) 64,350 41,050 44,400

106

2,600 187,400


$ 60,000 45,000 35,000 140,000

149,800

Question 39-5A

So and Ho Trading and Profit and Loss Account for the year ended 31 March 20X9

$ $ Sales Less Cost of goods sold: Opening inventory 38,410 Add Purchases 136,680 175,090 Less Closing inventory (41,312 ) Gross profit Less Expenses: Salaries 27,400 Office expenses ($2,130 + $240) 2,370 Discounts allowed 312 Depreciation: Motor vehicles ($21,400 × 25%) 5,350 Office equipment ($9,200 × 20%) 1,840 7,190 Net profit Add Interest on drawings: So 300 Ho 200 Less Interest on capital: So ($50,000 × 5%) 2,500 Ho ($20,000 × 5%) 1,000 Balance of profit shared: So (70%) Ho (30%)

$ 180,400

(133,778 ) 46,622

(37,272 ) 9,350 500 9,850 (3,500 ) 6,350 4,445 1,905 6,350


$ Fixed assets Cost Office equipment 9,200 Motor vehicles 21,400 30,600

$ Accumulated depreciation 5,440 18,150 23,590

$ Net book value 3,760 3,250 7,010

Current assets Inventory 41,312 Debtors 41,940 Bank 2,118 Cash 317 85,687 Less Current liabilities Creditors 32,216 Expenses owing 240 (32,456 )

53,231 60,241

Capital: So Ho

70,000

50,000 20,000


107

So Ho Current accounts $ $ $ $ Balance 1.4.20X8 7,382 7,009 Add Interest on capital 2,500 1,000 Share of profit 4,445 1,905 14,327 9,914 Less Drawings 17,500 16,000 Interest on drawings 300 (17,800 ) 200 (16,200 ) (3,473 ) (6,286 )

$

(9,759 ) 60,241

Question 39-7A

But, Ho and Wong Trading and Profit and Loss Account for the year ended 30 April 20X4

$ $ Sales Less Returns inwards Less Cost of goods sold: Opening inventory 68,127 Add Purchases 196,239 Carriage inwards 3,100 199,339 267,466 Less Closing inventory (74,223 ) Gross profit Less Expenses: Salaries and wages 54,117 Discounts allowed 190 Rates ($2,900 – $200) 2,700 Postage ($845 – $68) 777 Bad debts 1,620 Provision for doubtful debts ($1,400 – $950) 450 General expenses 1,017 Depreciation: Computers 2,800 Office equipment 1,100 3,900 Net profit Add Interest on drawings: But 300 Ho 200 Wong 240 Less Salaries: Ho 18,000 Wong 14,000 32,000 Interest on capital: But ($60,000 × 8%) 4,800 Ho ($10,000 × 8%) 800 Wong ($30,000 × 8%) 2,400 8,000 Balance of profit shared: But ( 12 ) Ho ( 18 ) Wong ( 38 ) 108


$ 334,618 (10,200 ) 324,418

(193,243 ) 131,175

(64,771 ) 66,404

740 67,144

(40,000 ) 27,144 13,572 3,393 10,179 27,144

Balance Sheet as at 30 April 20X4

$ $ Accumulated Fixed assets Cost depreciation Office equipment 5,700 4,000 Computers 8,400 6,400 14,100 10,400 Current assets Inventory 74,223 Debtors 51,320 Less Provision for doubtful debts (1,400 ) 49,920 Prepayments ($200 + $68) 268 Bank 5,214 129,625 Less Current liabilities Creditors (36,480 ) Net current assets Financed by: Capital accounts: But Ho Wong

60,000 10,000 30,000

But Ho Wong Current accounts $ $ $ Balances at 1.5.20X3 5,940 (2,117 ) 9,618 Add Salaries — 18,000 14,000 Interest on capital 4,800 800 2,400 Share of profit 13,572 3,393 10,179 24,312 20,076 36,197 Less Drawings (39,000 ) (16,000 ) (28,000 ) Interest on drawings (300 ) (200 ) (240 ) (14,988 ) 3,876 7,957

$ Net book value 1,700 2,000 3,700

93,145 96,845

100,000

(3,155 ) 96,845

Question 39-9A (a) (i) A partnership is the relationship which exists between persons carrying on a business in common with a view to making a profit. (ii) A partnership deed is drawn up to define the rights and obligations of the partners.


109

(b)

Mr Ma and Mr Ng Trading, Profit and Loss and Appropriation Account for the year ended 31 December 20X4

$000 $000 Sales Less Sales returns Less Cost of goods sold: Opening stock 4,395 Add Purchases 21,167 Less Purchase returns (49 ) 21,118 25,513 Less Closing stock (3,693 ) Gross profit Less Expenses: Administration expenses ($2,388,000 + $67,000) 2,455 Salaries and wages ($704,000 – $208,000) 496 Rent ($715,000 – $55,000) 660 Provision for bad debts 192 943 Depreciation — office equipment ($4,715,000 × 20%) Net profit Appropriation: Interest on drawings: Mr Ma ($880,000 × 10%) 88 Mr Ng ($620,000 × 10%) 62 Interest on capital: Mr Ma ($2,200,000 × 5%) 110 Mr Ng ($2,200,000 × 5%) 110 220 Partner’s salary: Mr Ma 208 Share of profit: Mr Ma ($3,170,000 × 45 ) Mr Ng ($3,170,000 × 15 )

(c) 20X4 Dec 31 Balance b/f " 31 Drawings " 31 Interest on drawings " 31 Balance c/d

110

$000 30,077 (63 ) 30,014

(21,820 ) 8,194

(4,746 ) 3,448

150 3,598

(428 ) 3,170 2,536 634 3,170

Partners’ Current Accounts Mr Ma $000 — 880 88 2,040 3,008

Mr Ng $000 20X4 330 Dec 31 Balance b/f 620 " 31 Interest on capital 62 " 31 Share of profit — " 31 Balance c/d 1,012


Mr Ma $000 362 110 2,536 — 3,008

Mr Ng $000 — 110 634 268 1,012

(d)


$000 $000 Fixed assets Office equipment, at cost Less Provision for depreciation Current assets Stock 3,693 Trade debtors 3,689 Less Provision for bad debts (420 ) 3,269 Prepayment 55 7,017 Less Current liabilities Trade creditors 2,864 Accruals 67 Bank overdraft 211 (3,142 ) Net current assets

$000 4,715 (2,418 ) 2,297

3,875 6,172

Financed by: Capital accounts Mr Ma Mr Ng Current accounts Mr Ma 2,040 Mr Ng (268 )

2,200 2,200 4,400

1,772 6,172

Question 39-10A (a)

Mr Ma and Mr Ng Trading, Profit and Loss and Appropriation Account for the year ended 31 December 20X0

$ $ Sales Less Sales returns Less Cost of goods sold: Opening stock 49,940 Add Purchases 263,260 Add Carriage inwards 4,280 267,540 Less Purchases returns (560 ) 266,980 316,920 Less Closing stock (51,000 ) Gross profit

$ 384,975 (720 ) 384,255

(265,920 ) 118,335


111

$

Less Operating expenses: Depreciation: Office equipment ($53,000 × 20%) 10,600 Motor vehicles ($38,400 × 20%) 7,680 Carriage outwards ($10,240 – $4,280) 5,960 Salaries and wages ($8,000 + $700) 8,700 Rent ($7,500 – $200) 7,300 45 Provision for bad debts Net profit Appropriation: Interest on capital: Mr Ma ($25,000 × 10%) 2,500 Mr Ng ($25,000 × 10%) 2,500 Mr Ma’s salaries Share of balance: Mr Ma ($61,050 × 35 ) Mr Ng ($61,050 × 25 ) (b)

112

(40,285 ) 78,050

(5,000 ) (12,000 ) 61,050 36,630 24,420 61,050

Mr Ma and Mr Ng Balance Sheet as at 31 December 20X0

$ $ Fixed assets Office equipment, at cost 53,000 Less Provision for depreciation ($15,900 + $10,600) (26,500 ) Motor vehicles 38,400 Less Provision for depreciation ($7,680 + $7,680) (15,360 ) Current assets Stock 51,000 Debtors 41,920 Less Provision for bad debts ($320 + $45) (365 ) 41,555 Prepayment 200 Cash at bank and in hand 2,400 95,155 Less Current liabilities Creditors 32,550 Accruals 700 (33,250 ) Net current assets Financed by: Capital account

$

Mr Ma $ 25,000


Mr Ng $ 25,000

$

26,500 23,040 49,540

61,905 111,445

50,000

$ $ Current account Balance as at 1 January 20X0 4,137 (3,742 ) Add Salaries 12,000 — Interest on capital 2,500 2,500 Share of balance 36,630 24,420 55,267 23,178 Less Drawings (10,000 ) (7,000 ) 45,267 16,178

$

61,445 111,445

Question 40-2A (a)

Balance Sheet as at 1 October 20X2

Goodwill Other assets

$ 72,000 180,000 252,000

Capital: Ma ($30,000 + $7,200) But ($70,000 + $28,800) Fong ($35,000 + $14,400) To ($45,000 + $21,600)

37,200 98,800 49,400 66,600 252,000

(b)

Before

1 Ma 10 2 But 5 1 Fong 5 3 To 10

After $ 1 7,200 5 3 28,800 10 2 14,400 5 1 21,600 10 72,000

Gain or loss

$ 14,400 Gain 21,600 Loss 28,800 Gain 7,200 Loss 72,000

Action needed

$ 7,200 Dr Ma’s capital 7,200 Cr But’s capital 14,400 Dr Fong’s capital 14,400 Cr To’s capital

$ 7,200 7,200 14,400 14,400

Balance Sheet as at 1 October 20X2

Net assets

$ 180,000

Capital: Ma ($30,000 – $7,200) But ($70,000 + $7,200) Fong ($35,000 – $14,400) To ($45,000 + $14,400)

22,800 77,200 20,600 59,400 180,000


113

Question 40-4A (a)

Share of old goodwill

1 Wong 6 1 Ho 2 1 Au 3 Chow —

Share of new goodwill

$ 1 10,000 3 5 30,000 12 1 20,000 6 1 — 12 60,000

Action needed

$ 20,000 Dr Wong’s capital 25,000 Cr Ho’s capital 10,000 Cr Au’s capital 5,000 Dr Chow’s capital 60,000

$ 10,000 5,000 10,000 5,000

Capital Accounts

Wong Ho Au Chow $ $ $ $ Adjustments Balances b/d for goodwill 10,000 — — 5,000 Adjustments Balances c/d 4,000 29,400 30,400 19,000 for goodwill Cash 14,000 29,400 30,400 24,000 (b)

Wong Ho Au $ $ $ 14,000 24,400 20,400

Chow $ —

— 5,000 10,000 — — — — 24,000 14,000 29,400 30,400 24,000

Balance Sheet

Other assets Cash ($1,200 + $24,000) Creditors

$ 66,000 25,200 91,200 (8,400 ) 82,800

Capital: Wong Ho Au Chow

4,000 29,400 30,400 19,000 82,800

Question 40-7A (a)

Profit and Loss Account for the year ended 31 December 20X5

$ $ Consultancy fees Less Expenses: Administrative expenses 46,600 Staff salaries 73,611 Electricity 11,375 Bad debts 4,700 Travelling expenses 8,690 Interest on Bai’s loan ($33,800 × 6% × 12 ) 1,014

114


$ 407,498

$ $ Depreciation: Land and buildings ($276,000 × 2%) 5,520 Motor vehicles [($122,000 – $50,375) × 25%] 17,906 Fixtures and fittings ($260,000 × 10%) 26,000 49,426 Net profit (b)

$

(195,416 ) 212,082

Appropriation Account for the six months ended 30 June 20X5

$ Profit before interest ($212,082 + $1,014*) ÷ 2 Appropriations: Interest on capital: Bai ($113,000 × 5% × 12 ) 2,825 Chiu ($130,000 × 5% × 12 ) 3,250 2,844 Poon ($113,750 × 5% × 12 )

$ 106,548

Balance of profit shared: Bai ($97,629 × 13 ) Chiu ($97,629 × 13 ) Poon ($97,629 × 13 ) * Interest on Bai’s loan from 1 July 20X5 to 31 December 20X5

32,543 32,543 32,543 97,629

(c)

Appropriation Account for the six months ended 31 December 20X5

$ Profit before interest and salary Less Interest on loan 1,014 Salary: Pak ($12,000 × 12 ) 6,000 Appropriation: Balance of profit shared: Chiu ($99,534 × 16 ) Poon ($99,534 × 12 ) Pak ($99,534 × 13 ) Note: No interest is payable on partners’ capital under the new partnership agreement. (d)

(8,919 ) 97,629

$ 106,548 (7,014 ) 99,534 16,589 49,767 33,178 99,534

Calculation of the Amount Due to Bai in January 20X6

Share of profit for the 6 months to 30 June 20X5 Interest on capital Interest on loan Less Drawings

$ 32,543 2,825 1,014 36,382 (15,600 ) 20,782


115

Question 40-10A (a)

Patrick, Lawrence and Victor Trading and Profit and Loss Account for the year ended 31 December 20X0

$ Sales Less Cost of goods sold Gross profit Less Administrative expenses 800,000 Selling and distribution expenses 600,000 Financial expenses 10,000 Depreciation — plant and equipment (W1) 95,000 — motor vehicles (W2) 40,000 Net profit

$ 4,000,000 (1,955,000 ) 2,045,000

(1,545,000 ) 500,000

Appropriations: Patrick Lawrence Victor $ $ $ First 6 months Salary 50,000 30,000 — 80,000 Share of profit 127,500 42,500 — 170,000 250,000 Next 6 months Salary 50,000 30,000 30,000 110,000 Share of profit 84,000 28,000 28,000 140,000 250,000 311,500 130,500 58,000

500,000

(Transferred to partners’ current accounts)

Note: The profit accrued evenly throughout the year and has been split between the old and new partnership on a time-apportioned basis. (b) Calculation of goodwill adjustments: Partner

Share of goodwill $200,000 in old ratio in new ratio

3 Patrick 4 1 Lawrence 4 Victor — (c)

$ 3 150,000 5 1 50,000 5 1 — 5 200,000

$ 120,000 40,000 40,000 200,000

Gain / (loss)

$ $ (30,000 ) Cr C/A of Patrick by $30,000 (10,000 ) Cr C/A of Lawrence by $10,000 40,000 Dr C/A of Victor by $40,000


$ Fixed assets Cost Plant and equipment 950,000 Motor vehicles 250,000 1,200,000 116

Adjustment required

$ Provision for depreciation 345,000 90,000 435,000


$ Net book value 605,000 160,000 765,000

$ Current assets Inventories 500,000 Debtors 500,000 Bank 140,000 1,140,000 Less Current liabilities Creditors (300,000 ) Net current assets

840,000 1,605,000

Financed by: Capital — Patrick — Lawrence — Victor

1,150,000

690,000 230,000 230,000

Current accounts — Patrick (W3) 311,500 — Lawrence (W4) 125,500 18,000 — Victor (W5) Workings: (W1) $950,000 × 10% (W2) ($250,000 – $50,000) × 20% (W3) $311,500 + $30,000 – $30,000 (W4) $130,500 + $10,000 – $15,000 (W5) $58,000 – $40,000

$

455,000 1,605,000


Goodwill

$ $ Balance b/d 12,400 Revaluation 12,400

(ii)

Revaluation

$ $ $ Goodwill 12,400 Plant and machinery ($16,800 – $16,320) 480 Inventory ($6,420 – $6,100) 320 Loss on revaluation: Fong ( 58 ) 7,650 Wong ( 38 ) 4,590 12,240 12,720 12,720

(iii)

Loss on revaluation Balances c/d

Capital Fong Wong Ho $ $ $ 7,650 4,590 — Balances b/d 11,811 9,887 12,000 Bank 19,461 14,477 12,000

Fong Wong Ho $ $ $ 19,461 14,477 — — — 12,000 19,461 14,477 12,000


117

(b)

Balance Sheet

$ Fixed assets Plant and machinery at valuation

$ 16,800

Current assets Inventory 6,100 Debtors 4,100 Bank ($626 + $12,000) 12,626 22,826 Less Current liabilities Creditors (5,928 ) Net current assets

16,898 33,698

Capital Fong Wong Ho

11,811 9,887 12,000 33,698

Question 41-3A (a)

Revaluation Account

Plant and machinery Motor vehicles Inventories Accounts receivable Profit on revaluation: Capital — Daniel Capital — Elaine Capital — Fiona (b)

$000 80 Land and buildings 20 15 5 90 60 30 300

$000 300

300

Goodwill Account

Capital — Daniel Capital — Elaine Capital — Fiona

$000 60 Capital — Daniel 40 Capital — Elaine 20 Capital — Fiona 120

$000 30 60 30 120

Note: Alternative treatment for goodwill may also be accepted. (c)

Capital Account

Daniel Elaine Fiona $000 $000 $000 Goodwill 30 60 30 Balance b/d Balance c/d 1,046 1,240 620 Profit on revaluation Goodwill 1,076 1,300 650 118

Daniel Elaine $000 $000 926 1,200 90 60 60 40 1,076 1,300


Fiona $000 600 30 20 650

Balance b/d Balance c/d (d)

Current Account Daniel Elaine $000 $000 — 51 187 57 187 108

Fiona $000 — Balance b/d 67 Profit for the year 67

Daniel Elaine $000 $000 25 — 162 108 187 108

Fiona $000 13 54 67

Balance Sheet as at 1 January 20X4

$000 Fixed assets Land and buildings Plant and machinery Motor vehicles Current assets Inventories 105 Accounts receivable 67 Cash 35 207 Less Current liabilities Accounts payable (120 ) Net current assets Long-term liabilities Bank loan Capital Daniel Elaine Fiona

$000 2,800 270 160 3,230

87 3,317 (100 ) 3,217

1,046 1,240 620

2,906

Current Daniel 187 Elaine 57 67 Fiona

311 3,217


119


Revaluation Account

Plant and equipment ($6,800,000 × 20%) Inventories ($8,480,000 – $8,240,000) Provision for doubtful debts Capital accounts: Audrey ( 102 ) Bill ( 103 ) Carmen ( 105 )

$000 1,360 Goodwill 240 Motor vehicles ($550,000 – $500,000) 20 86 129 215 2,050

$000 2,000 50

Goodwill 2,000 Plant and equipment Motor vehicles 50 Capital accounts: Audrey ( 36 ) Bill ( 26 ) Carmen ( 16 ) 2,050

1,360 345 230 115 2,050

2,050

Partners’ Capital Accounts

(ii)

Revaluation (new ratio) Balance c/d

Audrey $000 345 1,741 2,086

Bill Carmen $000 $000 230 115 Balance b/d 3,399 6,100 Revaluation (old ratio) 3,629 6,215

Audrey $000 2,000 86 2,086

Bill Carmen $000 $000 3,500 6,000 129 215 3,629 6,215

(b) Goodwill is the difference between the value of business as a whole and the aggregate of the fair values of its separable net assets. The major problems in valuing goodwill are that the value of goodwill is highly subjective and there is no universally accepted method with which to calculate goodwill. It may be a matter of negotiation between buyer (newly admitted partner) and seller (existing partners). Moreover, goodwill may have different values at different times.

Question 42-2A

120

Gain and Main Profit and Loss Appropriation Account for the year ended 31 March 20X8

$ $ Net profit b/d Less Salary: Main 9,750 Interest on capital: Gain ($10,000 × 10%) 1,000 Main ($5,000 × 10%) 500 1,500

(11,250 ) 15,000

Balance of profit shared: Gain ( 35 ) Main ( 25 )

9,000 6,000 15,000


$ 26,250

Current

Gain Main $ $ Balance b/d — 2,000 Balance b/d Realisation: Car taken over 1,000 — Capital transferred Plain Ltd: Shares 24,000 16,000 Profit and loss appropriation: Bank: to settle — 4,170 Salary Interest Share of profit Realisation profit shared Bank: to settle 25,000 22,170

Gain $ 1,000 10,000

Main $ — 5,000

— 9,750 1,000 500 9,000 6,000 1,380 920 2,620 — 25,000 22,170

Realisation

$ $ $ Fixtures and fittings 2,000 Creditors 500 Land and buildings 30,000 Depreciation: Fixtures and fittings 1,000 Motor vehicles 4,500 Motor vehicles 1,300 Stock 3,000 Gain: Car taken over 1,000 Debtors 2,000 Plant Ltd: Purchase price 40,000 Profit on realisation: Gain ( 35 ) 1,380 Main ( 25 ) 920 2,300 43,800 43,800

Bank

Balance b/d Gain: to settle

$ 1,550 Main: to settle 2,620 4,170

$ 4,170 4,170

Plain Ltd

$ $ Realisation 40,000 Gain 24,000 Main 16,000 40,000 40,000


121

Question 42-3A (a)

Realisation

20X2 $ 20X2 $ Dec 31 Goodwill 80,000 Dec 31 Motor vehicles taken over: " 31 Motor vehicles 274,000 Capital: Mr Lo 91,000 " 31 Fixtures and fittings 483,000 Mr Mung 86,000 " 31 Stock 211,000 Mr Chan 102,000 " 31 Debtors 260,000 " 31 Bank: Sundry assets 808,000 " 31 Dissolution expenses 8,000 Debtors 250,000 " 31 Profit on realisation: " 31 Discount received 1,000 Capital: Mr Lo 8,800 Mr Mung 8,800 Mr Chan 4,400 1,338,000 1,338,000 (b)

Capital

Lo Mung Chan Lo Mung Chan 20X2 $ $ $ 20X2 $ $ $ Dec 31 Realisation: Dec 31 Balance b/f 352,600 453,700 404,700 Motor vehicles " 31 Profit on taken over 91,000 86,000 102,000 realisation 8,800 8,800 4,400 " 31 Bank: Bank interest 800 800 400 " 31 Bank 269,600 375,700 306,700 361,400 462,500 409,100 361,400 462,500 409,100 (c)

Bank

20X2 $ 20X2 $ Dec 31 Realisation: Sundry assets 808,000 Dec 31 Balance b/f 87,000 " 31 Realisation: Debtors 250,000 " 31 Creditors 17,000 " 31 Capital: Bank interest 2,000 " 31 Capital: Mr Lo 269,600 Mr Mung 375,700 Mr Chan 306,700 1,058,000 1,058,000

122


Question 42-5A (a)

Revaluation

$000 $000 Furniture: Decrease Land and buildings: Increase ($12,000 – $5,000) 7 ($200,000 – $160,000) Motor vehicles: Decrease [$20,000 – ($10,000 + $4,000)] 6 Stock written off 5 Bad debt written off 2 Bad debt provision: Increase [($42,000 – $2,000) × 5% – $1,000] 1 Office expenses accrued 3 Dissolution costs 1 Capital: Proudie ( 35 ) 9 Slope ( 15 ) 3 Thorne ( 15 ) 3 15 40 (b)

$000 40

40

Capital

Motor vehicle Goodwill written off (W1) Cash Loan account: Transfer Balances c/d

Proudie $000 4 — 8 219 — 231

Slope Thorne $000 $000 — — Balances b/d 45 45 Current accounts — — Revaluation — — Loan 28 6 Goodwill share (W1) 73 51

Proudie $000 100 24 9 8 90 231

Slope Thorne $000 $000 60 40 10 8 3 3 — — — — 73 51

Working: $ $ (W1) Goodwill: Profits ($130,000 + $150,000 + $181,000) 461 Less Stock reduction 5 Bad debt written off 2 Increase in bad debt provision 1 Office expenses accrued 3 (11 ) 450

Average profit $450,000 ÷ 3 = $150,000; Proudie’s share = $150,000 × Goodwill write-off is split equally between Slope and Thorne.

3 5

= $90,000


123

(c)

Slope and Thorne Balance Sheet as at 1 June 20X9

$000 Fixed assets Land and buildings Furniture Motor vehicles

$000

$000

200 5 10

215

Current assets Stock 18 Debtors 40 Less Provision for bad debts (2 ) 38 Prepayments 2 Cash 2 60 Less Current liabilities Creditors 15 Accruals ($3,000 + $1,000 + $3,000) 7 (22 ) Working capital

38 253

Financed by: Capital: Slope Thorne Loan: Proudie

28 6 34 219 253

Question 43-5A (a)

Budgie Ltd Balance Sheet as at …

$000 Fixed assets Cost Less Accumulated depreciation

124

$000

$000

160 (50 )

110

Current assets Inventory 40 Debtors 47 87 Less Current liabilities Creditors 45 Bank overdraft 30 (75 ) Working capital

12 122

Shareholders’ funds Share capital Profit and loss

100 22 122


(b) Inventory represents almost half the current assets — the acid test ratio is 0.63:1 compared with the current ratio of 1.16:1 — and, in the absence of any information on industry norms, this level of inventory appears to be too high. If the bank demanded payment of the overdraft, the company would face severe liquidity problems. It should probably try to reduce the level of inventory held and reduce the bank overdraft.

Question 43-7A

TCC Ltd Trading and Profit and Loss Account for the year ended 31 December 20X5

$ $ Sales Less Cost of goods sold: Opening inventory 81,300 Add Purchases 623,800 705,100 Less Closing inventory (102,400 ) Gross profit Less Expenses: Wages and salaries 241,500 Motor expenses ($4,300 + $280) 4,580 Repairs to machinery 3,600 Sundry expenses 2,900 Depreciation: Land and buildings ($265,000 × 5%) 13,250 Machinery ($109,100 × 20%) 21,820 Motor vehicles ($34,700 × 20%) 6,940 42,010 Directors’ remuneration 82,600 Net loss Add Retained profits brought forward from last year Less Appropriation: General reserve Retained profits carried forward to next year

$ 975,600

(602,700 ) 372,900

(377,190 ) (4,290 ) 31,200 26,910 (7,500 ) 19,410


$ $ Accumulated Fixed assets Cost depreciation Land and buildings 265,000 73,250 Machinery 109,100 63,220 Motor vehicles 34,700 25,140 408,800 161,610 Current assets Inventory Receivables Bank

$ Net book value 191,750 45,880 9,560 247,190

102,400 169,600 17,900 289,900


125

$ $ Creditors: Amounts falling due within one year Payables 74,900 Motor expenses owing 280 (75,180 ) Net current assets Total assets less current liabilities Capital and reserves Issued share capital General reserve ($60,000 + $7,500) 67,500 Profit and loss account 19,410

$

214,720 461,910 375,000 86,910 461,910

Question 43-8A (a) (Narratives omitted)

The Journal

Dr $ (1) Creditors 10,000 Debtors Operating profit 1,000 Debtors Operating profit 4,000 Suspense (2) Bank 2,000 Debtors Operating profit 1,000 Bank (3) Operating profit 1,000 Debtors Provision for doubtful debts (Note 1) 1,140 Operating profit (4) Profit and loss brought forward 1,000 Operating profit Stock 2,000 Operating profit (5) Suspense (Note 2) 3,000 Operating profit Notes: 1 Debtors $200,000 – (1) $10,000 – (1) $1,000 – (2) $2,000 – (3) $1,000 = $186,000 New provision 1% × $186,000 = $1,860 Reduction in provision $3,000 – $1,860 = $1,140 2 See Note (5) of the question. Credit balance on suspense account treated as sales.

126


Cr $ 10,000 1,000 4,000 2,000 1,000 1,000 1,140 1,000 2,000 3,000

(b)

Fiddles PLC Profit and Loss Account for the year ended …

Operating profit (Note 1) Debenture interest (Note 2) Net profit for the year Add Retained profits brought forward from last year ($200,000 – $1,000) Less Proposed divided ($100,000 × 10%) Retained profits carried forward to next year

$ 80,140 (7,200 ) 72,940 199,000 271,940 (10,000 ) 261,940

Balance Sheet as at …

$ $ Fixed assets Land Buildings Plant and machinery 170,000 Less Accumulated depreciation (120,000 ) Current assets Stock ($190,000 + $2,000) 192,000 Debtors 186,000 Less Provision for doubtful debts (1,860 ) 184,140 Bank ($12,000 + $2,000 – $1,000) 13,000 389,140 Creditors: Amounts falling due within one year Creditors ($110,000 – $10,000) 100,000 Debenture interest accrued 7,200 Proposed dividend 10,000 (117,200 ) Net current assets Total assets less current liabilities Creditors: Amounts falling due after more than one year 16% debentures

$ 100,000 120,000 50,000 270,000

271,940 541,940

(180,000 ) 361,940

Capital and reserves Called-up share capital 100,000 Profit and loss account 261,940 361,940 Notes: 1 $80,000 + (3) $1,140 + (4) $1,000 + (4) $2,000 + (5) $3,000 – (1) $1,000 – (1) $4,000 – (2) $1,000 – (3) $1,000 = $80,140 2 $180,000 × 16% p.a. × 3 months = $7,200


127

Question 43-12A (a)

Minica Ltd Income Statement for the year ended 31 December 20X3

$ Sales ($3,845,000 – $15,000) Less Cost of goods sold: Opening inventory 360,000 Add Purchases ($2,184,000 – $60,000) 2,124,000 Carriage inwards 119,000 2,603,000 Less Closing inventory (450,000 ) Gross profit Add Profit on disposal of office equipment (W1) Less Expenses: Carriage outwards 227,000 Depreciation (W2) 94,000 Allowance for doubtful debts (W3) 11,000 Sundry administrative expenses (W4) 430,300 15,000 Bad debts Net profit

$ 3,830,000

(2,153,000 ) 1,677,000 9,000 1,686,000

(777,300 ) 908,700

(b) The proposed dividend of $240,000 (4,000,000 × $0.06) should be disclosed by way of a note in the published income statement of Minica Ltd. Workings: (W1) $15,000 – ($20,000 – $14,000) = $9,000 (W2) ($460,000 – $20,000) × 20% + ($60,000 × 20% × 12 ) = $94,000 (W3) ($620,000 × 5%) – $20,000 = $11,000 (W4) $416,000 + $28,700 – $14,400 = $430,300

Question 43-13A (a)

General Journal

Dr $ (1) Taxation — profit and loss 120,000 Taxation payable — balance sheet Being profits tax charge provided for the year ended 31 March 20X3. (2) Proposed final dividend — profit and loss 30,000 Proposed final dividend — balance sheet Being final dividend for the year ended 31 March 20X3 proposed by the board of directors on 7 April 20X3 ($500,000 ÷ $0.5 × $0.03).

128


Cr $ 120,000

30,000

(b)

Dragon Master Limited Profit and Loss Appropriation account for the year ended 31 March 20X3

$ Net profit for the year Taxation Profit after tax Appropriation: Interim dividend 20,000 Proposed final dividend 30,000 Retained profits for the year Retained profits brought forward Retained profits carried forward (c)

$ 580,000 (120,000 ) 460,000 (50,000 ) 410,000 731,000 1,141,000

Dragon Master Limited Balance Sheet as at 31 March 20X3

$ Fixed assets Plant and machinery, at cost 2,020,000 Less Provision for depreciation (320,000 ) Motor vehicles, at cost 365,000 Less Provision for depreciation (69,350 ) Current assets Inventories 145,000 Accounts receivable 76,000 Short-term investments 122,540 Prepayments 2,580 Cash at bank and in hand 6,400 352,520 Less Current liabilities Accounts payable 54,000 Taxation payable ($120,000 × 75%) 90,000 Accruals 3,170 147,170 Net current assets Total assets less current liabilities

$

1,700,000 295,650 1,995,650

205,350 2,201,000

Long-term liabilities 7% debenture 300,000 Taxation payable ($120,000 × 25%) 30,000

(330,000 ) 1,871,000

Capital and reserves Ordinary share capital Share premium General reserve Retained profits Proposed final dividend

500,000 80,000 120,000 1,141,000 30,000 1,871,000


129


Grant and Herd Profit and Loss Appropriation Account for the year ended 31.12.20X8

$000 $000 Net profit for the year Add Interest on drawings: Grand ($40,000 × 10% × 12 ) 2 Herd ($40,000 × 10% × 34 ) 3 Less Salary: Herd 20 Interest on capital: Grant ($300,000 × 5%) 15 Herd ($100,000 × 5%) 5 20

$000 60

Balance of profit shared: Grant ( 35 ) Herd ( 25 )

15 10 25

Grant $000 — 40 2 10 300 65 417

(iii)

Fixed assets Stocks Debtors and prepayments Trade debtors Profit on realisation to capital: Grant ( 35 ) Herd ( 25 )

130

(40 ) 25

Capital

(ii)

Salary paid Drawings Interest on drawings Car taken over Shares in Valley Ltd Bank

5 65

Herd $000 10 Balances b/d 40 Salary 3 Interest on capital — Share of profit 200 Realisation — Bank 253

Grant $000 300 — 15 15 87 — 417

Herd $000 100 20 5 10 58 60 253

$000 300 Depreciation 90 Trade creditors 18 Creditors and accruals 223 Grant: Car taken over 87 Valley Ltd: Consideration (400,000 × $1.25) 58 776

$000 100 141 25 10 500

Realisation


776

(b)

Valley Ltd Balance Sheet as at 1 January 20X9

$000 $000 Fixed assets at cost Intangible asset: Goodwill Tangible assets ($300,000 – $100,000 – $10,000) Current assets Stocks 90 Trade debtors 223 Debtors and prepayments 18 331 Less Current liabilities Trade creditors 141 Creditors and accruals 25 (166 ) Capital and reserves Called-up share capital Share premium

$000 145 190 335

165 500 400 100 500

Question 44-6A (a)

Capital Account — Mr Mak

20X4 $ 20X4 $ Mar 31 Debtors 40,000 Mar 31 Balance b/f 1,751,700 " 31 Balances to the new firm 1,811,700 " 31 Goodwill 100,000 1,851,700 1,851,700 (b)

Capital Account — Mr Pau

20X4 $ 20X4 $ ar 31 Revaluation of machine Mar 31 Balance b/f 1,418,200 M ($110,000 – $75,000) 35,000 " 31 Goodwill 80,000 " 31 Stock [$40,000 – $(38,000 – $5,000)] 7,000 " 31 Balances to the new firm 1,456,200 1,498,200 1,498,200


131

(c)

Mr Mak and Mr Pau Balance Sheet as at 1 April 20X4

$ Fixed assets ($720,000 + $540,000 – $35,000)

$ 1,225,000

Current assets Stock ($1,050,000 + $660,000 – $7,000) 1,703,000 Trade debtors ($430,000 + $370,000 – $40,000) 760,000 Cash at bank ($178,200 – $38,300) 139,900 2,602,900 Less Current liabilities Trade creditors ($410,000 + $330,000) (740,000 ) Net current assets

1,862,900 3,087,900

Capital accounts: Mr Mak ($1,811,700 – $108,000) Mr Pau ($1,456,200 – $72,000) (d) (i) achieve better operating results (ii) eliminate competition (iii) avoid hostile takeover bids

1,703,700 1,384,200 3,087,900

(Any two points)

Question 44-8A (a)

Jane and May Realisation Account

$ $ Land and buildings 500,000 Creditors 40,000 Plant and equipment 120,000 Motor vehicles taken over: Office equipment 40,000 Capital — Jane 24,000 Motor vehicles 80,000 Capital — May 36,000 Inventories 60,000 Bank: Inventories 50,000 Debtors 80,000 Debtors 60,000 Bank: Dissolution expenses 20,000 Purchases consideration: Creditors 36,000 Karen Co Ltd Share of profit (Note): Capital — Jane 87,000 — Cash 500,000 Capital — May 87,000 — 200,000 ordinary shares 400,000 1,110,000 1,110,000 Note: Since the profit or loss sharing ratio of the partnership has not been mentioned in the question, we shall assume that the partners share profit or loss equally.

132


(b)

Capital Accounts

Jane May $ $ Current account — 101,000 Balance b/d Motor vehicles 24,000 36,000 Current account Realisation: Profit on realisation Ordinary shares (W) 250,000 150,000 Bank 300,000 180,000 574,000 467,000 (Working) Share of ordinary shares of Karen Co Ltd between partners: Capital account Current account Share of realisation profit Motor vehicles taken Balance on capital account after realisation

Jane May $ $ 300,000 380,000 187,000 — 87,000 87,000

574,000 467,000

Jane May $ $ 300,000 380,000 187,000 (101,000 ) 87,000 87,000 (24,000 ) (36,000 ) 550,000 330,000

Ratio 5 : 3 Share of 200,000 ordinary shares with value of $400,000 $250,000 $150,000 (125,000 shares) (75,000 shares) (c)

Bank Account

$ Realisation: Karen Co Ltd 500,000 Balance b/d Inventories 50,000 Realisation: Creditors Debtors 60,000 Dissolution Capital account: Jane May 610,000

$ 74,000 36,000 20,000 300,000 180,000 610,000


John Lee and Daniel Wong Realisation Account

Plant and machinery Fixtures and fittings Motor vehicles Inventories Debtors Bank — dissolution costs — creditors Share of profit: Capital — Lee Capital — Wong

$000 392 Creditors 308 Motor vehicles taken over: 170 Capital — Lee 108 Capital — Wong 270 Sea Urchin Limited: Purchase consideration 3 290 423 282 2,246

$000 306 80 60 1,800

2,246


133

Capital Accounts

(ii)

Current account Motor vehicle taken over Sea Urchin Ltd: Ordinary shares Bank

Lee $000 510 25 423

Wong $000 340 — 282

958

622

$000 Sea Urchin Ltd 600 Balance b/d Creditors Dissolution costs Loan from John Lee Capital — Lee Capital — Wong 600

$000 6 290 3 100 158 43 600

Lee $000 — 80 720 158 958

Wong $000 39 Balance b/d 60 Current account 480 Profit on realisation 43 622 Bank Account

(iii)

(b) $000 Purchase consideration Less Fair value of assets acquired: Plant and machinery 600 Fixtures and fittings 420 Inventories 96 Debtors 250 Goodwill

$000 1,800

(1,366 ) 434

Question 44-11A (a)

Revaluation Account

Plant and machinery Capital: Chan Tai

$ $ 24,600 Land and buildings 300,000 183,600 91,800 300,000 300,000

Capital Accounts

Chan Tai Man $ $ $ Goodwill written off 247,500 123,750 123,750 Balance b/d Shares in CTM Ltd 864,650 497,575 237,775 Revaluation Goodwill Net profit ($143,100 – $6,600) Gain on realisation 1,112,150 621,325 361,525 134

Chan Tai Man $ $ $ 505,500 318,000 315,000 183,600 91,800 — 330,000 165,000 — 68,250 34,125 34,125 24,800 12,400 12,400 1,112,150 621,325 361,525


Calculation of goodwill: Average profits for last three years = $(150,000 + 262,500 + 330,000) ÷ 3 = $247,500 Goodwill = Average profits × 2 = $247,500 × 2 = $495,000

Realisation Account

$ $ Assets transferred: Liabilities transferred: Creditors 103,500 Land and buildings 1,200,000 Receivable from CTM Ltd 1,600,000 Plant and machinery 110,400 Inventories 30,000 Debtors ($66,000 – $6,600) 59,400 Bank 254,100 Gain on realisation: Capital: Chan 24,800 Tai 12,400 Man 12,400 1,703,500 1,703,500 (b) Dr $ Land and buildings 1,125,000 Plant and machinery 120,000 Inventories 45,000 Debtors 66,000 Bank 254,100 Goodwill 100,000 Provision for doubtful debts Creditors Payable to Chan, Tai and Man To record the acquisition of net assets from Chan, Tai and Man. Payable to Chan, Tai, and man 1,600,000 Share capital Share premium To record the issuance of 30,000 shares of $1 par, valued at $5 each, to Chan, Tai and Man.

Cr $

6,600 103,500 1,600,000

320,000 1,280,000


135

Question 45-2A (a)

Spreadlight Ltd

$430,000 (i) Gross profit as a percentage of sales $2,500,000 ×

Easylawn Ltd

100 1

= 17.2%

$430,000 $1,600,000

×

100 1

= 26.9%

(ii) Net profit as a percentage of sales

$166,000 $2,500,000

×

100 1

= 6.6%

$170,000 $1,600,000

×

100 1

= 10.6%

(iii) Expenses as a percentage of sales

$264,000 $2,500,000

×

100 1

= 10.6%

$260,000 $1,600,000

×

100 1

= 16.3%

(iv) Inventory turnover

$2,070,000 ($190,000 + $220,000) ÷ 2

(v) ROCE

$166,000 $368,000

×

(vi) Current ratio

$399,000 $189,000

(vii) Acid test ratio

$179,000 $189,000

100 1

= 10.1 times

$1,170,000 ($110,000 + $160,000) ÷ 2 $170,000 $223,000

×

= 2.1

$199,000 $38,000

= 5.2

= 0.95

$39,000 $38,000

= 1.03

= 45.1%

100 1

= 8.7 times

= 76.2%

(viii) Debtors/sales ratio

$104,000 $2,500,000

× 12 = 0.5 months

$29,000 $1,600,000

× 12 = 0.2 months

(ix) Creditors/purchases ratio

$189,000 $2,100,000

× 12 = 1.08 months

$38,000 $1,220,000

× 12 = 0.37 months

(b) Easylawn Ltd is the more efficient company. It has made $170,000 profit as compared with the $166,000 profit made by Spreadlight Ltd. It has achieved a return on capital employed of 76.2%, almost 70% higher than the 45.1% return achieved by Spreadlight Ltd. Reasons: These are conjecture — you really have to know more about the business before you can be definite. (i) Easylawn Ltd has managed to achieve a far greater percentage of gross profit, whilst maintaining a reasonable level of sales. (ii) Because expenses are lower, but gross profit is the same as that of Spreadlight Ltd, a higher figure of net profit is achieved by Easylawn Ltd. (iii) Easylawn Ltd has kept inventory down to figures lower than that of Spreadlight Ltd, although Spreadlight Ltd has managed to get a higher inventory turnover. (iv) Easylawn Ltd has a 69% higher rate of return on capital employed, helped by lower inventory, better debtors/sales ratio and relatively lower levels of creditors. (v) The acid test ratio for Easylawn Ltd appears to be healthier than that of Spreadlight Ltd.

Question 45-3A (a)

Table of Accounting Ratios

136

1

Current ratio

2

Acid test ratio

3

Net profit as a percentage of sales

4

Gross profit as a percentage of sales

A $180,000 = 1.1 $160,000 $100,000 = 0.6 $160,000 $30,000 = 3% $1,000,000 $600,000 = 60% $1,000,000


B $200,000 = 1.7 $120,000 $100,000 = 0.8 $120,000 $100,000 = 3.3% $3,000,000 $1,000,000 = 33% $3,000,000

5

Debtors/sales (months)

6

Creditors/cost of sales (months)

7

Return on owners’ equity

8

Gearing

$100,000 × 12 = $1,000,000 $110,000 × 12 = $400,000 $30,000 = 30% $100,000 $100,000 = 50% $200,000

1.2 3.3

$90,000 $3,000,000 $120,000 $2,000,000 $100,000 = $520,000 $130,000 = $650,000

× 12 = 0.4 × 12 = 0.7 19.2% 20%

(b) Should be in report fashion. Main points, briefly: (i) Both have a similar net profit percentage: A 3%; B 3.3%. However, the result was obtained very differently as A has a high gross profit percentage and every high expenses, whereas B has a lower gross profit percentage and relatively lower expenses. (ii) The higher gearing of A leads to a higher return on owners’ equity. The extra debts of A could lead to problems when profits fall. (iii) A’s high creditors/cost of sales ratio is very worrying, as is the low current ratio. (iv) The figures are considerably distorted by B’s land revaluation. This leads to B’s ROOE being understated, whilst that of A — by comparison — is overstated.

Question 45-6A (a) (i) Acid test ratio: Eastwood Limited Westland Limited (ii) Asset turnover ratio: Eastwood Limited Westland Limited (iii) Creditors’ repayment period (in days) Eastwood Limited Westland Limited (iv) Current ratio: Eastwood Limited Westland Limited (v) Debtors’ collection period (in days) Eastwood Limited Westland Limited (vi) Gearing ratio: Eastwood Limited Westland Limited (vii) Gross profit margin: Eastwood Limited Westland Limited (viii) Interest cover: Eastwood Limited Westland Limited (ix) Net profit (after tax) margin: Eastwood Limited Westland Limited

(Current assets – Inventories) ÷ Current liabilities $(600,000 – 250,000) ÷ $790,000 = 0.4 $(630,000 – 155,000) ÷ $350,000 = 1.4 Sales ÷ Net assets employed $1,825,000 ÷ $580,000 = 3.1 $1,428,000 ÷ $880,000 = 1.6 Creditors ÷ Purchases (or cost of sales) × 365 days $270,000 ÷ $1,095,000 × 365 days = 90.0 days $170,000 ÷ $683,000 × 365 days = 90.8 days Current assets ÷ Current liabilities $600,000 ÷ $790,000 = 0.8 $630,000 ÷ $350,000 = 1.8 Debtors ÷ Sales × 365 days $150,000 ÷ $1,825,000 × 365 days = 30.0 days $175,000 ÷ $1,428,000 × 365 days = 44.7 days Long-term liabilities ÷ Owners’ equity × 100%* $110,000 ÷ $580,000 × 100% = 19.0% $100,000 ÷ $880,000 × 100% = 11.4% Gross profit ÷ Sales × 100% $730,000 ÷ $1,825,000 × 100% = 40% $745,000 ÷ $1,428,000 × 100% = 52.2% Profit from operations ÷ Interest $248,000 ÷ $88,000 = 2.8 times $340,000 ÷ $80,000 = 4.3 times Profit after tax ÷ Sales × 100% $50,000 ÷ $1,825,000 × 100% = 2.7% $110,000 ÷ $1,428,000 × 100% = 7.7%


137

(x) Return on capital employed (before interest and tax): Eastwood Limited Westland Limited * Other formulae may also be acceptable.

Profit from operations ÷ Capital employed × 100% $248,000 ÷ $690,000 × 100% $340,000 ÷ $980,000 × 100%

= 35.9% = 34.7%

(b) Profitability Although Eastwood Limited had a higher amount of sales, Westland Limited achieved a higher amount of gross profit and a higher gross profit margin of 52.2% as compared with the 40% ratio that Eastwood Limited achieved. This is possibly due to Eastwood Limited’s deliberate lower pricing policy in order to boost sales and / or Eastwood Limited was inefficient in its purchasing function. Coupled with a lower gross profit margin, Eastwood Limited achieved a net profit margin of 2.7%, compared with the ratio of 7.7% that Westland Limited achieved, mainly because of weaker cost control as reflected by the comparatively higher operating expenses and a higher interest cost incurred. However, the asset turnover ratio of Eastwood Limited was 3.1, which was significantly higher than 1.6 ratio of Westland Limited. This indicates that Eastwood Limited was more efficient in managing its assets to generate sales. Consequently, Eastwood Limited was running at a return on capital employed of 35.9%, which was slightly more than the ratio of 34.7% of Westland Limited. Eastwood Limited performed better in terms of profitability from the shareholders’ point of view.

Short-term liquidity Both companies had a similar creditors’ repayment period of approximately 90 days. Regarding the debtors’ collection period, Eastwood Limited had better credit control in that it achieved a ratio of 30.0 days as compared with 44.7 days achieved by Westland Limited. Despite better credit control, both the current and acid test ratios of 0.8 and 0.4 respectively together with the net current liabilities appeared in the balance sheet indicate that Eastwood Limited had a poor liquidity situation. The company might not be able to pay the short-term debts when due and action may need to be taken. In contrast, Westland Limited’s corresponding ratios of 1.8 and 1.4 reveal that it had ample liquid assets to meet its current liabilities.

Question 45-8A (a) (all in $000) (i) Current ratio: Dahlia Limited Poppies Limited (ii) Quick asset ratio: Dahlia Limited Poppies Limited (iii) Asset turnover ratio: Dahlia Limited Poppies Limited (iv) Gross profit margin: Dahlia Limited Poppies Limited (v) Net profit margin: Dahlia Limited Poppies Limited 138

Current assets ÷ Current liabilities 510 ÷ 724 380 ÷ 238 (Current assets – Inventories) ÷ Current liabilities (510 – 310) ÷ 724 (380 – 140) ÷ 238 Sales ÷ Capital employed 1,200 ÷ 5,186 800 ÷ 3,242 Gross profit ÷ Sales × 100% 420 ÷ 1,200 × 100% 200 ÷ 800 × 100% Profit before interest and tax ÷ Sales × 100% 270 ÷ 1,200 × 100% 80 ÷ 800 × 100%


= 0.70 = 1.60 = 0.28 = 1.01 = 0.23 = 0.25 = 35% = 25% = 22.5% = 10%

(vi) Return on capital employed: Dahlia Limited Poppies Limited (vii) Gearing ratio: Dahlia Limited Poppies Limited (viii) Interest cover: Dahlia Limited Poppies Limited

Profit before interest and tax ÷ Capital employed × 100% 270 ÷ 5,186 × 100% 80 ÷ 3,242 × 100% Long-term liabilities ÷ Capital employed × 100% 2,750 ÷ 5,186 × 100% 800 ÷ 3,242 × 100% Profit before interest and tax ÷ Interest 270 ÷ 180 80 ÷ 24

= 5.21% = 2.47% = 53.03% = 24.68% = 1.5 times = 3.33 times

(b) Profitability Dahlia Limited achieved a higher gross profit margin of 35% as compared with the 25% achieved by Poppies Limited. Coupled with its comparatively low operating expenses, Dahlia Limited generated a net profit margin of 22.5%, as compared with the 10% ratio that Poppies achieved. The asset turnover ratio of Poppies Limited was 0.25, which was marginally higher than the ratio of 0.23 of Dahlia Limited. The breakdown of return on capital employed (ROCE) into net profit margin and asset turnover ratio indicates that although Dahlia Limited was making slightly less efficient use of its assets than Poppies Limited, Dahlia Limited achieved a much higher ROCE of 5.21%, which was more than double the 2.47% ratio achieved by Poppies Limited. In conclusion, Dahlia was generating a better return for its shareholders and providers of long-term finance.

Short-term liquidity Both the current and acid test ratios of 1.60 and 1.01 respectively indicate that Poppies Limited had good liquidity. Dahlia Limited’s corresponding ratios of 0.70 and 0.28 were far from satisfactory and reveal that it was short of liquid funds to meet short-term liabilities when due despite its better performance in terms of profitability. Dahlia Limited needs to pay greater attention to the management of its working capital.

Long-term solvency Dahlia Limited had a higher gearing ratio of 53.03% and a lower interest cover of 1.5 times, which imply that it had higher financial risk. On the other hand, the gearing ratio of 24.68% and interest cover of 3.33 times of Poppies Limited were quite acceptable and better than those of Dahlia Limited.

Question 45-10A (a) Ratio analysis calculations 20X1 (i) Return on shareholders’ capital = Profit before tax ÷ Share capital and reserve × 100% 24.6% (ii) Net assets turnover = Turnover ÷ Net assets 2.9 (iii) Total assets turnover = Turnover ÷ Total assets 2.2 (iv) Inventory turnover period = Average inventories ÷ Cost of goods sold × 365 days 181.7 days (v) Receivable collection period = Average trade receivables ÷ Annual credit sales × 365 days 55.6 days (vi) Debt ratio = Total liabilities ÷ Total assets × 100% 23.8% (vii) Equity ratio = Total owner’s equity ÷ Total assets × 100% 76.2% (viii) Interest cover = Profit before interest and tax ÷ Net finance costs 2.3 (ix) Dividend cover = Earnings per ordinary share ÷ Dividend per ordinary share 1.0 (x) P/E ratio = Current market price per share ÷ Earnings per share 3.0 (xi) Dividend yield = Dividend per share ÷ Current market price per share 33.3% (xii) Earnings yield = Earnings per share ÷ Current market price per share 33.3%


139

(b)

140

Report to Board of Directors (as a demonstrated example only) To : Directors — Gotech Company Limited From : XYZ (name written down by the candidate) Date : X-X 20X2 Subject : Financial situation of the company in 20X1 The following comments are based on a financial ratio analysis of the financial statements of Gotech Company Limited for the two-year period 20X0 to 20X1. The relevant ratios for analysis are contained in the appendix to this report. 1 Liquidity These ratios are important indicators of the short-term viability of the company. A company may go into insolvency because of liquidity problems rather than poor profitability. Compared with 20X0, both the current ratio and quick ratio in 20X1 decreased. This may initially be considered as a sign of the deterioration in liquidity, and less liquid or near liquid assets in terms of its ability to meet its current liabilities. Management should investigate the reasons for the decline and try to keep current assets at an acceptable level. Otherwise the company may have difficulty in financing continuing operations. 2 Profitability Gross profit and trading profit were levelling off in 20X1. The gross profit margin dropped while the trading profit margin remained relatively stable. This may have been caused by effective internal cost controls of the company in terms of salaries and other expenses. Management should investigate method(s) to further control costs, and look into the factors causing the surge in costs of sales. Returns on total assets and returns on shareholders’ capital increased. This shows that the company is better utilising its assets. However, the company should look into the impact of the change in the components of its assets, as it current assets dropped but fixed assets rose in 20X1. The drop in current assets may worsen liquidity and the working capital of the company. The rise in fixed assets may have come to an end. The fixed assets turnover ratio may have been pushed down. Detailed analyses should be conducted. 3 Management efficiency Net assets turnover and total assets turnover rose slightly. If we also compute the fixed assets turnover ratio, we see that the ratio dropped significantly in 20X1 (from 9.62 times to 6.45 times) as the result of a surge in fixed assets. The growth in fixed assets and total assets is justified by the potential growth in sales. Concerning the working capital cycle, inventory levels had dropped since 20X0. The company may have tight inventory controls or management should keep and establish a safe inventory level system if necessary. Receivable collection period was high in 20X0 and decreased in 20X1. Management should consider offering discounts or other alternatives in order to keep the receivable collection period as short as possible. The industry average can be taken as a benchmark. 4 Debt and equity ratios These ratios will be of interest to stakeholders in the company such as creditors and shareholders. These ratios may be referred to as ‘gearing ratios’ to reflect the relative amount of company funds provided by equity or liabilities. The higher gearing ratio may imply the use of cheaper long-term finance, or the higher financial risk of the company, which may suffer, especially during periods of volatile profitability. Little change occurred in the debt and equity ratios in 20X0 and 20X1. This reflects stability of the company’s capital structure.


5 Interest and dividend covers Interest cover represents the coverage of trading profit to interest payment. The ratio rose slightly from 2.2 to 2.3 in 20X1. This may be in line with the drop in the average debt level. It reflects a larger coverage of trading profit to interest expenses. Dividend cover indicates the coverage of earnings per share to dividend per share. The smaller the ratio, the higher the portion of the dividend paid out from the earnings in each share, and the less retained funds kept by the company for further growth. 6 Investment ratios The P/E represents the ratio of the market price of the company’s ordinary shares to earnings per share (alternatively, market capitalisation of the company to total earnings for the year). The surge in the ratio may be due to growing market demand for its ordinary shares. The P/E rose in 20X1. This may be caused by the company’s business nature (IT). The result was an increase in stock price. Management should investigate the increase to check for any abnormal transactions that may have caused the boost in the stock price. Dividend yield increased but the earnings yield decreased in 20X1. The earnings yield represents the return received by investors with respect to the share price. The lower the ratio, the longer the time investors must wait for returns to be paid. The rise in dividend yield may benefit the company if long-term funds are to be requested from equity investors. However, management may consider adopting a more conservative dividend policy in line with earnings and the forecast of the company’s development. This will deteriorate shareholder confidence if the company’s future revenues are not promising. 7 Conclusion With regard to the ratios discussed above, management should consider the company’s ratios in view of the industry average, or the ratios of similar organisations. The company is gradually growing in terms of its sales volume. Management may consider the diversification of business in order to eliminate the external economic environment risk.

Question 45-11A (a)

Apillon Year ended 31 March

20X2 (i) Current ratio: $990,000 ÷ $430,000 2.30 $1,420,000 ÷ $860,000 (ii) Quick ratio: $450,000 ÷ $430,000 1.05 $700,000 ÷ $860,000 (iii) Inventory age $540,000 ÷ $1,900,000 × 365 days 103.7 days $720,000 ÷ $2,400,000 × 365 days (iv) Average period of credit allowed to customers $450,000 ÷ $2,800,000 × 365 days 58.7 days $700,000 ÷ $3,700,000 × 365 days (v) Average period of credit taken from suppliers $410,000 ÷ $2,080,000 × 365 days 71.9 days $690,000 ÷ $2,580,000 × 365 days

20X3

1.65

0.81

109.5 days

69.1 days

97.6 days


141

(b) Comments (i) The growth in sales has caused a shortage of working capital, as shown by significant increases in the debtors’ collection period (69.1 days in 20X3 vs. 58.7 days in 20X2) and the creditors’ repayment period (97.6 days vs. 71.9 days). (ii) Inventory levels have increased considerably, rising from $540,000 at 31 March 20X2 to $720,000 at 31 March 20X3. Inventory turnover deteriorated slightly from 103.7 days to 109.5 days, probably due to less stringent inventory control. (iii) Both the current and quick ratios have worsened significantly. For the current ratio, it fell from 2.30 to 1.65, while the quick ratio fell from 1.05 to 0.81. This could be a sign of liquidity problems in the future. (iv) Cash sales have fallen dramatically, with the cash sales/sales ratio dropping from 9.7% of sales in 20X2 to only 2.6% in 20X3. The working capital position could be significantly improved by increasing the level of cash sales, which would reduce the use of bank overdraft.

142


Frank Wood's Business Accounting HK Edition (3rd Edition) Solution

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