SECTION A

Answer any FOUR questions from this section. Each question carries 10 marks.

1. a. Explain the following accounting concepts and illustrate each with an example:

i. Historical cost

ii. Stable monetary measures (5 marks)

b. For each of the independent situations described below, list the accounting principle or concept that has been violated and give your explanation:

i. Andy Company accrued interest expense on the personal bank loan of the owner at year end.

ii. Perfect Repairs adopts a policy of charging hand tools with small unit costs to expense when purchased, even though the tools have a useful life of several years. During the year, Perfect Repairs recorded revenue of $600000 and a hand tools expense of $150000 in its profit and loss account. (5 marks)

2. The cash book of Ronald Limited showed a favourable bank balance of $98777 at 30 April 2001. An examination of the bank column in the cash book and the bank statement disclosed the following:

iii. Dividends amounting to $752 had been credited by the bank but not entered in the cash book.

iv. The bank had credited the company’s account with $3725 being the proceeds of a bill receivable. This amount was recorded as a payment in the cash book.

v. Bankings amounting to $8127 had been entered in the cash book but not credited by the bank until 1 May 2001.

vi. A dishonoured cheque for $920 was identified in the bank statement.

vii. Being allowed a cash discount of $15, a customer settled his account with a cheque of $300. However, an amount of $315 was entered in the bank column of the cash book.

viii. Cheques issued amounting to $2647 had not been presented to the bank for payment.

ix. The company had instructed the bank to transfer $5000 from the fixed deposit account to the current account. The bank had made the transfer in reverse.

x. The company had recorded a payment by standing order of a sum of $1025 for the management fee of the office premises. The bank had debited the account of another customer.

Required:

a. Show the necessary adjustments in the cash book. (5 marks)

b. Prepare a bank reconciliation statement as at 30 April 2001, commencing with the adjusted cash book balance. (5 marks)

3. In preparing the accounts for the year to 31 March 2001, the accountant of Man Yee Limited identified from the trial balance a balances total of the purchases ledger of $139060. However, the purchases ledger control account showed a credit balance of $139193 and a debit balance of $367. Further investigation revealed the following:

i. A cash discount of $180 from a creditor had been completely omitted from the accounting records.

ii. A purchase invoice for $7542 had been entered in the purchases day book as $5724.

iii. Purchases of $250 had been entered on the wrong side of a supplier’s account in the purchases ledger.

iv. A credit note for $600 had been received and entered as if it was a debit note.

v. No entry had been made to record a contra of an amount owed to Lam of $6000 against an amount owed by Lam of $4000.

vi. The debit balance of $367 had been listed as a credit balance in the creditors’ schedule.

Required:

a. Prepare a statement to adjust the balances total of the purchases ledger. (5 marks)

b. Draw up the purchases ledger control account. (5 marks)

4. Mannix Company commenced business on 1 March 2001. An inexperienced bookkeeper for the company prepared the following profit and loss account based on the cash receipts and payments made during the month of March 2001:

Additional information:

i. Credit sales amounted to $114000 and the whole amount has not yet been received.

ii. Credit purchases amounted to $150000, of which $110000 was still owing to the suppliers.

iii. Unsold goods amounted to $12000 at cost at 31 March 2001.

iv. The office equipment was purchased for $76000 cash. It was estimated to have a useful life of 5 years and a residual value of $4000.

v. Warehouse rent of $5000 for March was to be paid on 5 April 2001.

vi. Received March electricity bills amounting to $5900. They were to be paid in April 2001.

Required:

Prepare the trading and profit and loss account of Mannix Company for the month ended 31 March 2001. (10 marks)

5. The following information is supplied by the bookkeeper of the Overseas Manufacturing Company for the year ended 31 March 2001:

Additional information:

i. Depreciation was to be provided for:

ii. Electricity charges of $165000 were in arrears at 31 March 2001.

iii. Electricity and water was to be apportioned as follows:

iv. Salaries of administrative staff included an amount of $80000 payable to the factory manager as a bonus.

Required:

Prepare the manufacturing and trading accounts of Overseas Manufacturing Company for the year ended 31 March 2001, showing clearly the cost of raw materials consumed, the prime cost, the production cost of finished goods and gross profit. (10 marks)

6. Betty Limited acquired a machine on hire purchase terms from Excellent Finance on 1 January 1998. The cash price of the machine was $120000. The terms of the hire purchase contract required a deposit of $40000 and three annual instalments of $40000, $40000 and $32640 on 31 December 1998, 1999 and 2000 respectively. The finance company charged interest at 20 % per annum on outstanding balances.

Required:

Prepare the following accounts in the books of Betty Limited to record the above transactions:

xi. Excellent Finance. (6 marks)

xii. Hire purchase interest suspense. (4 marks)

SECTION B

Answer any THREE questions from this section. Each question carries 20 marks.

7. The following trial balance was extracted from the books of Kelly Limited at 31 March 2001:

Additional information:

i. Office equipment costing $5000 and with a provision for depreciation of $2000 was sold for $1200. The sales had been recorded as cash sales.

ii. Depreciation was to be charged as follows:

iii. Stock as at 31 March 2001 amounted to $36420.

iv. The following adjustments were to be made on 31 March 2001;

v. $800000 8% debentures were issued at par on 1 July 2000. The proceeds had been credited to the share and debenture issue account. Interest on debenture was to be paid half yearly on 30 June and 31 December of each year.

vi. In April 2000, 50000 ordinary shares were offered to the public at $2.50 per share. The company credited the share and debenture issued account in respect of this issue.

vii. The board of directors proposed transferring $120000 to the general reserve and declaring a final dividend of $0.30 per share.

Required:

a. The trading, profit and loss and appropriation account of Kelly Limited for the year ended 31 March 2001. (10 marks)

b. The balance sheet of Kelly Limited as at the same date. (10 marks)

8. The treasurer of Relax Club has prepared the following receipts and payments account for the year ended 31 December 2000.

Additional information:

i. Some of the club’s balances as at 31 December were as follows:

ii. As at 13 December 1999, the club owned equipment with a cost of $36000 and an accumulated depreciation of $19500. It is the club’s policy to write off the cost of the equipment evenly over a period of 10 years.

iii. All of the investments held at 31 December 1999 costing $16000 were sold during the year.

iv. The amount of bar stock had not been ascertained at 31 December 2000. The bar maintains a gross profit margin of 40% on all bar sales.

Required to prepare:

a. a bar trading account for the year ended 31 December 2000. (5 marks)

b. an income and expenditure account for the year ended 31 December 2000. (8 marks)

c. a balance sheet as at the same date. (7 marks)

9. Bill and dick were in partnership sharing profits and losses in the ratio of 2:1 respectively. The balance sheet as at 13 March was as follows:

On 31 March 2001, Bill retired and his son, Tim, was admitted to the partnership on the following terms:

i. Goodwill was estimated to have a value of $202500. No goodwill account was to remain in the partnership books.

ii. The equipment was to be revalued at $80000 and motor vehicles were to be revalued at 5% above the net book value.

iii. An item of stock costing $500 was considered as worthless.

iv. Dick and Tim were to share profits and losses equally.

v. Tim’s capital was agreed at $300000. This amount was to be transferred from the amount owing to Bill. A similar transfer was to be made to pay for Tim’s share of goodwill.

vi. Dick was to withdraw cash so that the capital account balances of Dick and Tim are in the ratio of 1:1.

vii. The balance owing to Bill was to be retained as a loan to the new partnership.

Required to prepare:

a. the revaluation account of the partnership of Bill and Dick. (4 marks)

b. the capital accounts of Bill, Dick and Tim in columnar form.

(11 marks)

c. a balance sheet for the new partnership of Dick and Tim as at 31 March 2001. (5 marks)

10. On 31 March 2001, the trial balance of George Lee, a wholesaler, failed to agree and the difference was entered in a suspenses account. After the draft final accounts had been prepared, the following matters were discovered. The draft profit for the year amounted to $156403.

i. The credit side of the salaries account had been undercast by $1000.

ii. Credit sales of $3812 had been correctly credited to the sales account but had been debited to the customer’s account as $3182.

iii. The bookkeeper had been instructed to reduce the provision for doubtful debts by $1300. However, an increases of $1100 in provision for doubtful debts had been made.

iv. Due to an oversight, a cash discount had been allowed to a credit customer on an invoiced amount of $8000 at the rate of 10%. A discount of 7% should have been recorded.

v. Rent of $6000 which had been prepaid at 31 March 2000 had not been brought down in the rent account as an opening balance.

vi. Prepaid insurance of $1829 had been wrongly accounted for as an accrual.

vii. A cash payment of repairs on a motor vehicle for $9500 had been recorded as $5900 in the motor vehicles account and the cash account. Wages of $40000 paid for the construction of a store room was debited to the wages account. It is the policy of the company to provide depreciation on the cost of all fixed assets at 10% per annum.

Required:

a. Prepare journal entries to correct the above. (Narrations are not required.) (11 marks)

b. Prepare a statement to correct the draft net profit for the year ended 31 March 2001. (9 marks)

END OF PAPER

CE Principles of Accounts 2001 Paper