2001-AL P ACCT

PAPER 1

HONG KONG EXAMINATIONS AUTHORITY HONG KONG ADVANCED LEVEL EXAMINATION 2001

PRINCIPLES OF ACCOUNTS A-LEVEL PAPER 1

8.30 am 11.30 am (3 hours) This paper must be answered in English

Answer FOUR questions. TWO from Part A (60%), and TWO from Part B (40%). All workings must be shown.

Hong Kong Examinations Authority All Rights Reserved 2001
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Part A Answer any TWO questions from this section. Each question carries 30 marks. 1. Peter and Paul had been operating trading businesses in their own names. On 1 January 2000, they decided to amalgamate their businesses and formed a partnership P & P Company. The balance sheets of Peter and Paul at 31 December 1999 were shown as follows: Peter $ 360 000 175 000 83 300 46 000 27 000 (33 000) 658 300 658 300 658 300 Paul $ 260 000 110 000 37 500 22 000 4 500 (44 000) 390 000 10 000 380 000 390 000

Plant and machinery (net book value) Motor vehicles (net book value) Stock Debtors Cash Creditors

Capital Bank loan

The terms of amalgamation contained in the partnership agreement included: (i) The initial capital of the partnership would be Peter $600 000 and Paul $400 000, contributed in the form of net assets and cash. Any excess of net assets over the initial capital would be treated as a loan to the partnership. The net assets taken over by the partnership were as follows: (1) (2) Plant and machinery was taken over at 10% above the net book value at 31 December 1999. Except for one motor vehicle which was taken over by Peter for his personal use at its net book value of $75 000, all the remaining motor vehicles were taken over by the partnership at 20% below the net book value at 31 December 1999. Stock and creditors (excluding the bank loan) were taken over at their book values whereas 5% was to be written off from the debtors. The goodwill of Peters business was valued at the weighted average of the last three years profits. The profits for 1997, 1998 and 1999 were $60 000, $80 000 and $125 000 respectively. The weights assigned to years 1997, 1998 and 1999 were 1, 3 and 4 respectively. It was agreed that after the goodwill was taken over by the partnership, the goodwill account should not be maintained.

(ii)

(3) (4)

(iii) (iv) (v)

The profit and loss sharing ratio between Peter and Paul would be 3:2 respectively. Peter and Paul were entitled to an annual salary of $60 000 and $48 000 respectively. Interests on loan and capital would be allowed at 10% per annum. They were to be transferred to the respective partners current accounts. The financial year of the partnership ends on 31 October.

(vi)

You are required to prepare: (a) the balance sheet of the partnership at 1 January 2000. (8 marks)

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The following information relates to the partnership business for the ten months ended 31 October 2000: (vii) Extract of balances at 31 October 2000: Stock Debtors Creditors Bank overdraft Net loss (before appropriation) for the financial year (viii) $ 111 000 220 000 286 000 34 000 39 000

A full years insurance to 31 December 2000 of $12 000 was charged to the profit and loss account. Loan(s) owed to partner(s) was/were repaid on 1 July 2000. Net loss for the year was arrived at before taking into account: (1) (2) (3) (4) depreciation on fixed assets at 15% per annum; provision for doubtful debts at 5% of the debtors at 31 October 2000; accrued staff salaries $80 000; and interest on loan payable to the partner(s).

(ix) (x)

(xi)

No drawings were made by the partners during the ten months.

You are required to prepare: (b) the profit and loss appropriation account of the partnership for the financial year ended 31 October 2000, and (6 marks) the balance sheet of the partnership at 31 October 2000. (7 marks)

(c)

Unfortunately, Paul had an accident on 1 November 2000 and was severely injured. The business was therefore closed for two days. The following events occurred afterwards: (xii) (xiii) On 3 November 2000, the partners decided to dissolve the partnership. On 4 November 2000: (1) (2) (3) (4) (5) (6) (xiv) (xv) Peter took over the motor vehicles at a value of $130 000; some items of plant and machinery were sold for $280 000; stock was realised for $120 000; all debtors accounts were settled for $200 000; the excess two months insurance was refunded; and the accrued salaries were paid.

On 10 December 2000, the creditors were paid. On 28 January 2001, the remaining plant and machinery was sold for $170 000.

You are required to prepare: (d) the bank account covering the period from 1 November 2000 to 28 January 2001, showing the amounts of cash distributed to the partner(s) on 4 November 2000 and 28 January 2001. (Note: Ignore interests on bank overdrafts.) (9 marks)

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2.

Universe Ltd was incorporated and commenced business on 1 January 1999, issuing at par 200 000 ordinary shares of $10 each. On 1 January 2000, the company issued a further 100 000 ordinary shares at $14 per share. Universe Ltd sells both clocks and watches. The clocks are manufactured by Universe Ltd and watches are supplied by local manufacturers. After drafting the final accounts of Universe Ltd, the following information related to the accounting year ended 31 December 2000 was revealed: Clocks Watches (i) (ii) (iii) Sales for the year Gross profit margin Stocks at cost 1 January 2000 Raw materials Finished goods Work in progress Stocks at cost 31 December 2000 Raw materials increased by Finished goods increased by Work in progress (iv) (v) (vi) Proportion of credit sales to cash sales Trade debtors repayment period Creditors settlement period 1/4 1/7 Nil 3:1 One month Three months 1/5 2:1 Two months Two months $168 000 $492 800 Nil $226 800 $13 024 000 60% $3 612 000 40%

Business as a whole (vii) (viii) (ix) Current ratio Ratio of sales to the year-end fixed assets Gearing ratio (being long-term liabilities to shareholders' equity) 1.8 : 1 4:1 12.5%

Further information: (x) (xi) Sales of clocks and purchases of raw materials were evenly distributed throughout the year. Sales of watches were seasonal. The monthly average sales for January, February, November and December were double those of the other months. Purchases of watches were made two months in advance. It was estimated that the sales level of both clocks and watches for 2001 would be the same as 2000. Manufacturing costs of clocks include direct materials, direct labour, direct expenses and factory overheads. The proportion of total costs on direct materials, direct labour and direct expenses of the total prime cost was 28:23:15 respectively. Factory overheads equal 1/3 of prime cost. The administration expenses are equal to 5 times the factory overheads.

(xii)

(xiii)

(xiv)

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(xv) (xvi)

Selling and distribution expenses for the year amounted to $1 306 000. A bank loan was obtained on 1 January 2000, repayable in 2010. Loan interest accrued at 31 December 2000 amounted to $85 000. The company had a bank overdraft at 31 December 2000 and the bank overdraft interest for the year amounted to $68 200. Cash at 31 December 2000 amounted to $330 890. The return on shareholders equity for 1999 (based on shareholders equity at the year end) was 20% and no dividend was declared for that year. A dividend of $1 per share was declared at 31 December 2000.

(xvii)

(xviii) (xix)

You are required to prepare: (a) the trading accounts in columnar form for clocks and watches for the year ended 31 December 2000; (6 marks) the manufacturing account for the year ended 31 December 2000; and (5 marks)

(b) (c)

the trading and profit and loss account for the business as a whole for the year ended 31 December 2000 and the balance sheet as at the same date. (19 marks)

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3.

Hope Ltd has an authorised share capital of 5 000 000 ordinary shares of $5 each. The trial balance at 31 December 2000 is shown as follows: $000 4 320 9 300 4 000 $000

Leasehold properties Plant and machinery Motor vehicles Accumulated depreciation, 1 January 2000 Plant and machinery Motor vehicles Stock, 1 January 2000 Provision for doubtful debts, 1 January 2000 Cash at bank Purchases and sales Rental income Administration expenses Selling and distribution expenses Taxation Interim dividend Application and allotment money received Trade debtors and trade creditors Ordinary shares 8% debentures Share premium Revaluation reserve Deposit on the purchase of a motor vehicle Rental deposit General reserve Profit and loss, 1 January 2000 Accrued audit fee (for the year 2000)

2 900 1 600 2 890 184 4 734 18 540 8 326 5 094 60 200 7 450 2 800 3 123 10 000 3 375 250 500 120 320 822 110 65 094 38 450 540

180

65 094

Additional information: (i) 400 000 ordinary shares were offered to the public during the year. The issue price was $8 per share, payable in 3 instalments: $4 (including share premium) on application, $3 on allotment and $1 when called. All shares were allotted on 28 December 2000. The final call was made on 1 March 2001. $3 375 000 8% debentures were issued at par on 1 September 2000 and repayable in 2020. The first interest payment was due on 1 March 2001. Leasehold properties represented a property in Wanchai purchased in early 1999 for $3 820 000. It is the companys policy that no depreciation is to be provided for leasehold properties but revaluation has to be made at the end of each year. The value of the property at 31 December 1999 was $4 320 000. The value of the property at 31 December 2000 was to be $3 200 000. The property was leased out and the rental deposit of $120 000 represented two months rent. According to the tenancy agreement, the rental deposit would be forfeited and applied to cover the rent if the rent was outstanding for more than one month. At 31 December 2000, the tenant owed 3 months rent.

(ii)

(iii)

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(iv)

Plant and machinery was depreciated on the straight-line basis at an annual rate of 25%. There were no additions and disposals of plant and machinery during the year. All the motor vehicles were purchased on 1 January 1998 for $4 000 000. It was estimated that they had a useful life of 5 years with no scrap value. The straight line method of depreciation was adopted. On 1 January 2000, there was a change in the accounting policy and the motor vehicles would be depreciated at an annual rate of 35% using the reducing balance method.

(v)

(vi)

Details of stock at 31 December 2000 were as follows: Cost $ 940 000 970 000 Net Realisable Value $ 1 420 000 910 000

Type A goods Type B goods (vii)

Expenses shown in the trial balance included the following items: Administration expenses Audit fee (not yet paid) Taxation consultancy fee Hire of plant Directors fee Salaries to administrative staff Electricity and water Selling and distribution expenses Carriage outwards Advertising $ 110 000 20 000 550 000 980 000 3 678 000 372 800 $ 3 437 000 836 000

(viii)

Besides those listed in (vii) above, the company classified expenses by function as follows: Administration expenses Depreciation on plant and machinery Selling and distribution expenses Depreciation on motor vehicles Provision for doubtful debts Finance cost Debenture interest Other operating expenses All others

(ix)

Provision for doubtful debts for the year should be made at 2% on the outstanding trade debtors at year end. On 25 December 2000, Hope Ltd entered into a non-cancellable contract for the purchase of a motor vehicle at the cost of $850 000. A deposit of $180 000 was made and the motor vehicle would be delivered to Hope Ltd before 1 June 2001. At 31 December 2000, a customer sued Hope Ltd for breaching a sales contract and demanded a compensation of $735 000. Legal advice indicated that the chances of Hope Ltd losing the case were very high and the amount claimed by the customer was reasonable and certain. $320 000 was provided for the 1999 taxation but the actual tax liability was $380 000. Profits tax for the year 2000 was estimated at $295 000. A final dividend of $0.2 per share was proposed on all fully paid shares.

(x)

(xi)

(xii)

(xiii)

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You are required to: Prepare for Hope Ltd the following in a form suitable for publication and in accordance with the Tenth Schedule of the Hong Kong Companies Ordinance (Chapter 32): (a) (b) (c) the profit and loss account for the year ended 31 December 2000; the balance sheet as at that date; and the notes to the accounts. (12 marks) (7 marks) (11 marks)

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Part B Answer any TWO questions from this section. Each question carries 20 marks. 4. Hong Lok Chess Club was formed on 1 April 1999. An inexperienced bookkeeper was employed and the transactions of the club were mainly recorded on a cash basis. The balance sheet at 31 March 2000 was as follows: $ 84 000 260 000 107 400 451 400 101 400 350 000 451 400

Office equipment (at purchase price) Bar equipment (at purchase price) Cash

Surplus fund Loan from members

The following information relates to the state of affairs at 31 March 2000: (i) Surplus fund at 31 March 2000 was made up of: Cash Receipts: Subscription fees Bar receipts Cash Payments: Snack and beverages for bar Wages of bar waiters Rent (25% occupied for bar trading) Insurance (1 April 1999 - 28 February 2001) Administrative expenses $ $ 315 000 242 000 557 000

126 000 65 000 130 000 50 600 84 000

(455 600) 101 400

(ii)

Amounts outstanding at 31 March 2000: $ 15 000 10 000 8 000 35 000

Subscription fees owed by members Rent of April 2000 prepaid Accrued bar waiters wages Amount owing to snacks and beverages suppliers (iii) (iv) Stock of snacks and beverages amounted to $12 000.

Depreciation on fixed assets was to be calculated using the reducing balance method at an annual rate of 30%.

You are required to: (a) Calculate the accumulated fund of Hong Lok Chess Club as at 31 March 2000 using the accrual basis of accounting. (4 marks)

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The following events relate to the accounting year ended 31 March 2001: (v) Cash payments made during the year: Snacks and beverages suppliers Wages of bar waiters ($10 500 for the wages of April 2001) Rent for the 12 months ended 30 April 2001 Insurance from 1 March 2001 to 28 February 2002 Administrative expenses Additional bar equipment (vi) $ 276 000 165 000 120 000 28 200 92 000 50 000

Cash sales from bar trading amounted to $496 000. 1/4 of the sales were made to non-members at cost plus 100% while 3/4 were made to members at cost plus 50%. Amount owing to snacks and beverages suppliers at 31 March 2001 amounted to $74 000. Closing stock of snacks and beverages amounted to $10 000 only. It was believed that some stock had been stolen by a dismissed waiter. The value of the stock stolen was to be charged to the income and expenditure account for the year. On 1 April 2000, the members who made loans to the club had their status changed from ordinary members to life members. The loan from members was to be treated as life membership fees and amortised on a ten-year basis. Subscription fees received from members amounted to $430 000, of which $44 000 represented the fees of April 2001.

(vii) (viii)

(ix)

(x)

You are required to: (b) (c) Prepare a bar trading account for the year ended 31 March 2001. (5 marks)

Prepare an income and expenditure account for the year ended 31 March 2001 and a balance sheet as at that date. (11 marks)

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5.

The following balances of Dicksons trading business were extracted after the profit and loss account for the year ended 31 March 2001 had been prepared: $ 230 000 432 000 192 000 108 000 3 000 76 000 28 000

Stock as at 31 March 2001 Trade debtors less 4% provision for doubtful debts Hire purchase creditors Hire purchase interest suspense Bank balance Profit for the year ended 31 March 2001 Suspense account The following events were subsequently discovered: (i) (ii)

A return inward of $10 000 had been wrongly treated as a return outward in the trading account. The unit cost of stock at 31 March 2001 was wrongly calculated. The value of stock at that date should have been $200 000. A gross credit sale of $80 000 with 10% trade discount was made in March 2001. The following accounting entries were made: Debtors Discounts received Sales $ 80 000 $ 8 000 80 000

(iii)

As the credit period for all customers had been extended, Dickson decided to adjust the provision for doubtful debts to 5%. (iv) A new machine with a cash price of $468 000 was purchased on 31 October 2000 on hire purchase term. Under the hire purchase agreement, Dickson was required to pay 9 monthly payments of $64 000 each, the first being the deposit and commencing on 31 October 2000. Interest was to be apportioned using the sum-of-digit method. An installation fee of $42 000 incurred by Dickson before the machine was put into use had been charged to the profit and loss account. Fixed assets were to be depreciated on a monthly basis at an annual rate of 25%. However, a full years depreciation had been provided for the machine. On 1 April 2000, a motor vehicle costing $48 000 and with an accumulated depreciation of $22 000 was sold for $20 000. In calculating the profit and loss on the disposal of the motor vehicle, the accumulated depreciation had not been taken into account, recording a loss on disposal amounting to $28 000 charged to the profit and loss account. Apart from the above, there was no other addition or disposal of fixed assets. (v) On comparing the bank statement with the cash book for the month of March 2001, the following discrepancies were found: (1) A cheque of $124 000 received from a debtor was marked returned cheque on the bank statement at 31 March 2001. There was a credit transfer of $54 000 to the business on 28 March 2001. On 31 March 2001, a reverse entry of same amount was made and denoted as error correction.

(2)

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(3)

A cheque of $66 000 issued to a supplier in August 2000 remained unpresented. It was the banks practice that cheques unpresented for more than 6 months would become invalid. A new cheque for the same amount was re-issued to the supplier on 8 April 2001. Salaries to staff were settled by autopay at the end of each month by deducting from the business bank account and crediting the staff s individual bank accounts directly. Due to insufficient funds in the bank account at 31 March 2001, the autopay for the March 2001 salaries amounting to $92 000 was not executed until 2 April 2001. The amount had been accounted for as being paid by the business.

(4)

You are required to: (a) Prepare the necessary journal entries on 31 March 2001 for correcting the items above. State if no journal entry is required. (11 marks) Calculate the adjusted net profit for the year ended 31 March 2001. (7 marks)

(b) (c)

Prepare a bank reconciliation statement as at 31 March 2001, commencing with the balance as per cash book. (2 marks)

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6.

David started his wholesale clock business in Kwun Tong and later set up a retail branch in Mong Kok. All purchases were made by the Kwun Tong office. A transfer price was charged on the branch at a standard mark up of 50% in 1999 and adjusted to 25% in the year 2000. The sales of the head office and the branch were made at a uniform mark up of 20% on the purchase cost of the head office and the transfer price of the branch respectively. The trial balances at 31 December 2000 for both the head office and the branch were as follows: Head Office Dr Cr $ $ 2 592 000 3 440 000 1 580 000 454 000 80 000 312 000 68 400 192 000 62 000 778 000 638 000 794 000 152 000 5 396 400 288 400 5 396 400 174 000 2 372 000 2 372 000 80 000 196 000 150 000 186 000 Branch Dr $ Cr $ 1 734 000

Sales Purchases Good sent to branch at transfer price Goods from head office at transfer price General expenses Management fee income from branch Management fee charged by head office Furniture and fittings (net book value) Bank Stock, 1 January 2000 Provision for unrealised profit, 1 January 2000 Current account with branch Current account with head office Capital, 1 January 2000 Debtors Creditors

1 480 000 106 000

Further information: (i) A physical stocktaking was carried out in the Kwun Tong office at 31 December 2000 and the stock sheets revealed a stock value of $208 000 (at cost) for the head office. The closing stock of the branch amounted to $165 000 at transfer price and all these goods were transferred from the head office during the year. Any deficiency in stock occurring in the branch was to be treated as an abnormal loss. Goods at the transfer price of $100 000 were despatched by the head office on 31 December 2000 but only received by the branch on 1 January 2001. A branch debtor settled his trade debt of $40 000 by directly crediting the head offices bank account. The branch manager had not notified the head office of this. Depreciation was to be provided on the net book value of furniture and fittings at 20% per annum.

(ii)

(iii)

(iv)

(v)

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You are required to prepare: (a) the trading and profit and loss accounts for the year ended 31 December 2000 in columnar form showing the net profits of: (i) (ii) (iii) the head office, the branch, the business as a whole; and (16 marks) (b) the balance sheet for Davids business as a whole at 31 December 2000. (4 marks)

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