3. (A) the Books of Ka Fai Co Showed the Following Balances on 31 December 1999

2000 (P1)

3. (A) The books of Ka Fai Co showed the following balances on 31 December 1999:

$
Sales ledger: Debit balance
Credit balance / 39 100
200
Purchases ledger: Debit balance
Credit balance / 500
27000

The cash book transactions for the month of January 2000 were as follows:

Date / Particulars / Discount / Bank A / BankB / Date / Particulars / Discount / Bank A / Bank B
2000 / $ / $ / $ / 2000 / $ / $ / $
Jan-01 / Balance b/f / 1 300 / Jan-01 / Balance b/f / 140
4 / Debtors - Yeung / 180 / 16 320 / 3 / Petty cash / 1 000
5 / Debtors - Wu / 2 000 / 5 / Creditors / 400 / 19 600
10 / Sales / 2 670 / 8 / Equipment / 5 000
14 / Debtors - Au / 50 / 9 850 / 13 / Electricity / 2 560
15 / Debtors - Wu / 1 000 / 16 / Debtors - Wu / 1 000
20 / Sales / 3 430 / (cheque
23 / Debtor - Ho / 1 830 / dishonoured)
28 / Debtors - Chan / 3 750 / 19 / Purchases / 2 320
30 / Bills receivable / 2 650 / 23 / Debtors - Yeung / 330
- King / 2 600 / (goods returned)
31 / Balance c/f / 29 / Creditors / 9 300
30 / Creditors / 120 / 5 400
31 / Balance c/f / 750
230 / 11 350 / 36 050 / 520 / 11 350 / 36 050

Additional information relating to debtors and creditors was also given as shown below:

(i) The total credit purchases and sales for the month were $25 000 and $39 800 respectively. The amount of purchases included goods costing $500 received from a supplier as compensation for Ka Fai Co’s purchases returns in December 1999.

(ii) The total purchases returns and sales returns for the month were $3500 and $730 respectively. The amount of purchases returns included goods costing $280 returned to Asu Co whose account originally had a balance of zero. Asu Co is the only account carrying a debit balance in the purchases ledger at 31 January.

(iii) A bill amounting to $2750 was accepted by Mr King on 29 January and discounted with Bank A on the following day. Another bill amounting to $2200 was dishonoured on the maturity date of 17 January and the debtor accepted a new 30-day bill three days later for the bill amount plus interest of $30.

(iv) One of two cheques received from Mr Wu in January was dishonoured on 16 January. He was declared bankrupt at the end of the month.

(v) Balances amounting to $2340 were offset in the sales ledger and the purchases ledger only.

(vi) The credit balance in the sales ledger at 31 December 1999 related to goods returned by Mr Mong in December 1999. In January 2000, he returned more goods worth $100 to Ka Fai Co. There were no other credit balances found in the sales ledger at 31 January.

(vii) A creditor was paid for $400 out of the petty cash in January.

(viii) Mr Yeung was refunded on 23 January for goods returned in the month.

(ix) A credit note was received in January from a creditor who allowed Ka Fai Co $190 for goods damaged in transit.

Required:

Prepare for the month of January 2000 in the books of Ka Fai Co (assuming that the balance totals of both the purchases and sales ledgers at 31 December 1999 have been duly updated.)

(a) the sales ledger control account; and (7 marks)

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

(B) After recording all the above information in the control accounts, you found that the balances derived did not agree with the following balance totals of the ledger balances as at 31 January 2000:

$
Sales ledger / 35 730(net)
Purchases ledger / 1 880(net)

In addition, the bank statements for the month of January 2000 showed the following balances as at 31 January 2000:

$
Bank A / 310 (Dr)
Bank B / 1 550 (Cr)

After investigating the books, it was found that no adjustment needed to be made for the minority balances. The matters causing the discrepancies were summarized as follows:

(i) The discount allowed to Mr Au on 14 January should have been $150 instead of $50, and the amount received $9750. However, the amounts of $150 and $9850 had been credited to Mr Au’s account.

(ii) A cash sale of $980 to Mr Lee on 22 January had been entered in the sales day book and posted accordingly. However, the cheque received was deposited in Bank A without being entered in the cash book.

(iii) The purchases day book had been overcast by $3000.

(iv) Goods purchased from Mr Tam for $6540 had been recorded as a sale to Mr Lam.

(v) On 21 January, Mr Wong, a debtor, paid $2400 direct into Bank B to settle his debt amounting to $2520. No entries were made except the $2400 credited to Mr Wong’s account.

(vi) No entry had been made in the cash book for the transfer of $1500 from Bank B to Bank A on 25 January.

(vii) Overdraft interest of $190 had been charged by Bank A on 31 January.

(viii) A sales invoice of $1700 and a purchases invoice of $2600 showed the same name for two different people, the customer and supplier respectively. Only the net amount had been entered in the purchases day book and posted accordingly.

(ix) No entry had been made for a bill of $2100 accepted in January.

(x) Office equipment purchased on credit for $5370 from BOE Co had been entered in the purchases day book and posted to the BOE Co account in the general ledger.

(xi) Mr Ho, whose debt had been previously written off as bad, paid on 23 January. The amount was credited to Mr Lo’s account whichcarried a debit balance at 31 January.

Required:

(a) Prepare a statement in columnar form to adjust the debtors and creditors control accounts balances as at 31 January 2000. (5 marks)

(b) Prepare a statement in columnar form to adjust the balance totals of both the purchases and sales ledgers as at 31 January 2000. (5 marks)

(c) Show the totals of sundry debtors and sundry creditors in the balance sheet extract of Ka Fai Co as at 31 January 2000. (2 marks)

(d) Draw up a bank reconciliation statement in columnar form commencing with the cash book balance as at 31 January 2000. (6 marks)

Part B

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

4. Ko Po Ltd was incorporated on 1 May 1999, with an authorized capital of $1 000 000 in ordinary shares of $5 each, in order to take over the business of Mr Ko, a sole trader, as from 1 January 1999. The purchase consideration was agreed at $800 000, to be satisfied by the issue by the issue of 100 000 ordinary shares and $300 000 8% debentures to Mr Ko which were carried on until 31 December 1999.

On 1 July 1999, the company issued 20 000 ordinary shares to Mr Po for $40 000 cash plus a delivery van valued at $80 000. No other fixed assets were purchases or disposed of during the year.

The trial balance as at 31 December 1999 was extracted as follows:

$' 000 / $' 000
Capital, 1 January 1999 / 580
Furniture and equipment / 400
Accumulated depreciation on furniture and equipment, 1 January 1999 / 100
Delivery van / 80
Trade debtors / 360
Trade creditors / 170
Cash at bank / 320
Stock, 1 January 1999 / 110
Sales / 2 400
Purchases / 1 800
Rent and rates / 120
Selling expenses / 150
Preliminary expenses / 30
Mr Po / 120
3 370 / 3 370

Additional information:

(i) Stock at 31 December 1999 was valued at $150 000.

(ii) Interest at the annual rate of 6% was to be charged on the purchase consideration.

(iii) Depreciation was to be provided on the net book value of furniture and equipment at 30% and the cost of delivery van at 40% per annum.

(iv) The average monthly sales for the four months from January to April were one half of those for the remaining months of the year.

(v) 80% of the selling expenses is variable with sales. The gross profit margin, depreciation rates and fixed expenses were constant throughout the year.

(vi) Preliminary expenses were to be written off in the profit and loss account.

(vii) Directors’ fees of $40 000 were to be accrued.

(viii) The directors proposed a final dividend of 5%.

Required:

(a) Prepare a trading and profit and loss account for the year ended 31 December 1999, distinguishing between pre-incorporation and post-incorporation profits(or losses), and a balance sheet as at that date. (17 marks)

(b) Briefly describe three acceptable accounting treatments of pre-incorporation profits. (3 marks)

5. Mr Lim employed an accounting clerk to handle all the financial transactions and records for his trading business. He has just received the following statements prepared by the clerk;

Trading and profit and loss account for the year ended 31 December 1999

$ / $
Gross profit / 140 000
Add: Discounts received / 6 400
146 400
Less: Wages and salaries / 68 000
Rent / 30 000
Bad debts / 5 000
Discounts allowed / 4 320
Purchase of fixed assets / 10 000
General expenses / 24 000 / 141 320
Net profit / 5 080

Balance sheets as at 31 December

1998 / 1999
$ / $
Fixed assets(net) / 20 000 / 20 000
Current assets
Stock / 13 000 / 14 000
Debtors / 36 000 / 44 000
Bank / 19 500 / 800
Cash / 2 600 / 1 560
91 100 / 80 360
Less: Creditors / 24 000 / 31 000
Capital / 67 100 / 49 360

Mr Lim had three queries regarding the financial results. He wanted to find out why:

(1) the net profit for the year was so low;

(2) there was a decline in capital despite the profit made during the year; and

(3) there was a decrease in cash in hand and at bank.

He suspected that the accounting clerk had been stealing cash from the business and asked you to investigate.

After investigating all the relevant records, you found that the following adjustments needed to be made:

(i) Depreciation for the year was to be provided on the net book value of fixed assets at 20% per annum.

(ii) All goods were bought on credit except for an urgent order of $7000 which was paid by cash.

(iii) Sales were made at a mark-up of 50% on cost, although a 5% trade discount had been allowed on all cash sales. Half of the credit sales for the year were allowed 2% cash discount for payments made within 2 weeks.

(iv) All cash receipts were banked after payment of all the expenses, cash purchases and Mr Lim’s drawings of $5000 per month. Cheques had been drawn for payments to creditors amounting to $356 000 and the purchase of fixed assets.

(v) $5000 should have been accrued for salaries in addition to $68 000 paid during the year. Furthermore, rent of $30 000 had been paid for the 15 months ended 31 March 2000.

Required:

(a) Calculate the amount of cash defalcated by the accounting clerk. (10 marks)

(b) Prepare a trading and profit and loss for the year ended 31 December 1999 (6 marks)