# Answers to Mock Exam Paper (Mar 2014) Paper 2A

Answers to Mock Exam Paper (Mar 2014)— Paper 2A

SECTION A

1(a)

Insurance
2013 / \$ / 2013 / \$
Apr / 1 / Prepaid b/f / 5,000 / Apr / 1 / Accrued b/f / 6,000 / 0.50.5
May / 1 / Bank / 42,000 / 2014 / 0.5
Aug / 1 / Bank / 16,500 / Mar / 31 / Profit and loss / 52,000 / 0.50.5
" / 31 / Prepaid c/f / 5,500 / 1
(\$16,5004/12)
63,500 / 63,500
Rent Expense
2013 / \$ / 2014 / \$
Apr / 1 / Prepaid b/f / 4,000 / Mar / 31 / Profit and loss / 38,500 / 0.50.5
" / 1 / Bank / 24,000 / " / 31 / Prepaid c/f (\$9,0005/6) / 7,500 / 0.51
Sept / 1 / Bank / 9,000 / 0.5
2014
Mar / 1 / Bank / 9,000 / 0.5
46,000 / 46,000

(7 marks)

(b)The accrual concept has been violated. Under the accrual concept, revenues should be recognised when earned and expenses should be recognised when incurred, and not when money is received or paid. 0.5

Rental revenue for the year ended 31 March 2014 should be \$96,000 (= \$8,000 × 12) instead of the \$88,000 amount received. 0.5

(1 mark)

2(a)Workings:

(W1)

Per unit: / \$ / \$
Selling price / 150
Less:Direct materials / 60
Direct labour / 25
Variable overheads / 15 / 100
Contribution margin / 50
(i) / Break-even sales in units / = / Fixed overheads ÷ Unit contribution margin
= / \$200,000 ÷ \$50 (W1) / 1
= / 4,000 units / 0.5
(ii) / Contribution margin ratio / = / Unit contribution margin ÷ Unit selling price
= / \$50 ÷ \$150 / 1
= / 33.33% / 0.5
(iii) / Projected sales in units / = / Projected sales revenue ÷ Unit selling price
= / \$1,350,000 ÷ \$150
= / 9,000 units / 0.5
Margin of safety ratio / = / (9,000 ‒ 4,000) ÷ 9,000
= / 55.56% / 1

(b)Workings:

(W2)

Per unit: / \$ / \$
Selling price / 150
Less:Direct materials (\$60  106%) / 63.6
Direct labour (\$25  105%) / 26.25
Variable overheads / 20.15 / 110
Contribution margin / 40
Break-even sales in units / = / (\$200,000 + \$40,000) ÷ \$40 (W2) / 0.5
= / 6,000 units / 1
Margin of safety ratio / = / (Required sales volume ‒ Break-even sales in units) ÷ Required sales volume
55.56% / = / (RSV ‒ 6,000) ÷ RSV / 1
RSV (1 ‒ 55.56%) / = / 6,000
Required sales volume / = / 13,501 units / 1

3(a)

Penny LamComputation of Value of Inventory Stolen on 15January 2014 / 0
\$ / \$
Inventory as at 1 January 2014 / 176,500 / 0.5
Add / Purchases, 1–15 January 2014 (\$23,400 ‒ \$400) / (ii) / 23,000 / 1
Returns inwards, 1–15 January 2014at cost price (\$1,500 ÷ 125%) / (iv) / 1,200 / 24,200 / 1
200,700
Less / Sales, 1–15 January 2014 at cost price (\$37,200 ÷ 125%) / (iii) / 29,760 / 1
Inventory overstated [(\$15 ‒ \$3) 100] / (v) / 1,200 / 1
Drawings / (vi) / 2,000 / 32,960 / 0.5
Inventory as at 15 January 2014 / 167,740
Less / Inventory not stolen / 5,200 / 0.5
Inventory stolen on 15 January 2014 / 162,540 / 0.5

(6 marks)

(b)

The Journal
Date / Details / Dr / Cr
2014 / \$ / \$
Jan / 15 / Profit and loss —Inventory loss / 162,540 / 0.5
Purchases / 162,540 / 0.5
Mar / 28 / Bank (\$162,540 1/2) / 81,270 / 0.5
Profit and loss—Inventory loss / 81,270 / 0.5

(2 marks)

SECTION B

4(a)

The Journal
Item / Details / Dr / Cr
\$ / \$
(i) / Sales / 175,000 / 0.5
Capital / 175,000 / 0.5
(ii) / Accounts payable/Trade payables / 12,000 / 0.5
Capital / 10,000 / 0.5
Discounts received (\$12,000 \$10,000) / 2,000 / 0.5
(iii) / Returns inwards (\$20,000 + \$22,000) / 42,000 / 0.5
Suspense account (\$23,300 \$20,000) / 3,300 / 0.5
Purchases / 23,300 / 0.5
Accounts receivable/Trade receivables / 22,000 / 0.5
(iv) / Repairs and maintenance [(\$6,0002) + \$5,000] / 17,000 / 0.5
Drawings / 5,000 / 0.5
Suspense / 22,000 / 0.5
(v) / Salaries / 3,000 / 0.5
Accrued expenses / 3,000 / 0.5
Prepaid expenses / 1,150 / 0.5
Insurance / 1,150 / 0.5

(8 marks)

(b)

Henry ChanStatement of Corrected Net Profit for the year ended 30 September 2014 / 0
\$ / \$
Draft net profit / 525,000 / 0.25
Purchases / (iii) / 23,300 / 0.5
Insurance / (v) / 1,150 / 26,450 / 0.5
551,450
Less / Sales / (i) / 175,000 / 0.5
Returns inwards / (iii) / 42,000 / 0.5
Repairs and maintenance / (iv) / 17,000 / 0.5
Salaries / (v) / 3,000 / 237,000 / 0.5
Corrected net profit / 314,450 / 0.25

(4 marks)

(c)The business entity concept has been violated in item (iv). 1

According to this concept, a business is to be treated as an entity separate from its owner. No personal transactions of the owner are to be recorded in the books of the business. Therefore, the cost of repairs to Henry Chan’s home should not be recorded as a business expense. 1

(2 marks)

5(a)(i)

Realisation
\$ / \$ / \$
Goodwill / 100,000 / Capital: Ko —Machinery
Machinery and equipment / 163,750 / and equipment / 50,000 / 0.5
Motor vehicles / 325,000 / Inventory / 31,875 / 0.50.5
Inventory / 31,875 / Capital: Law — Machinery
Trade receivables / 102,175 / and equipment / 60,000 / 0.5
Bank —Dissolution expenses / 18,750 / Bank — Machinery and equipment / 0.5
[(\$163,750 \$110,000) 70%] / 37,625 / 0.5
Bank — Motor vehicles
(\$325,000 + \$59,500) / 384,500 / 0.5
Bank — Trade receivables / 95,000 / 0.5
received(\$87,500 10%) / 8,750 / 0.5
Loss on realisation —
Capital: Ko (3/6) / 36,900
Capital: Law (2/6) / 24,600 / 0.5
Capital: Mok (1/6) / 12,300 / 73,800
741,550 / 741,550

(5 marks)

(ii)

Bank
\$ / \$
Balance b/f / 28,450 / Realisation —Dissolution expenses / 18,750 / 0.1250.25
Realisation — / Final settlement —
Machinery and equipment / 37,625 / Capital: Ko / 242,145 / 0.1250.375
Motor vehicles / 384,500 / Capital: Law / 284,680 / 0.1250.375
Trade receivables / 95,000 / 0.125
545,575 / 545,575

(1.5 marks)

(iii)

Capital
Ko / Law / Mok / Ko / Law / Mok
\$ / \$ / \$ / \$ / \$ / \$
Current: Law / 1,500 / Balances b/f / 315,000 / 293,750 / 10,000 / 0.250.5
Current: Mok / 2,000 / Current: Ko / 6,000 / 0.250.25
Realisation — / Loan from Ko / 42,500 / 0.25
equipment / 50,000 / 60,000 / (\$87,500  90%) / 78,750 / 0.250.5
Inventory / 31,875 / Capital: Ko (3/5) / 2,580 / 0.250.5
Share of loss / 36,900 / 24,600 / 12,300 / Capital: Law (2/5) / 1,720 / 0.5 0.5
Capital: Mok / 2,580 / 1,720 / 0.5
Bank — Final
settlement / 242,145 / 284,680 / 0.5
363,500 / 372,500 / 14,300 / 363,500 / 372,500 / 14,300

(5 marks)

(b)Goodwill is the excess of the value of an entire business over the fair value of its separable net assets. 1

Adjustments for goodwill are required in the following situations:

Changes in the profit and loss sharing ratio

Retirement or death of partners

(Any two of the above) 0.75 each

(2.5 marks)

6(a)

Basis of
apportionment / Total / Sewing
department / Ironing
department / Finishing
department
Overheads: / \$ / \$ / \$ / \$
Indirect materials / Actual cost / 518,400 / 244,800 / 144,000 / 129,600 / 0.25
Indirect labour costs / Actual cost / 720,000 / 132,000 / 472,800 / 115,200 / 0.25
Machinery maintenance (W1) / Machine hours / 40,320 / 17,920 / 8,960 / 13,440 / 1
Machinery depreciation (W2) / Machinery value / 115,200 / 69,120 / 34,560 / 11,520 / 1
Factory utilities (W3) / Factory floor area / 100,800 / 50,400 / 31,500 / 18,900 / 1
Factory rent (W4) / Factory floor area / 92,160 / 46,080 / 28,800 / 17,280 / 1
Factory canteen expenses (W5) / No. of workers / 72,000 / 43,200 / 21,600 / 7,200 / 1
1,658,880 / 603,520 / 742,220 / 313,140

(5.5 marks)

Workings:

(W1)Apportionment of machinery maintenance:

Sewing department / = / \$40,320  40,000/90,000
= / \$17,920
Ironing department / = / \$40,320  20,000/90,000
= / \$8,960
Finishing department / = / \$40,320  30,000/90,000
= / \$13,440

(W2)Apportionment of machinery depreciation:

Sewing department / = / \$115,200  300,000/500,000
= / \$69,120
Ironing department / = / \$115,200  150,000/500,000
= / \$34,560
Finishing department / = / \$115,200  50,000/500,000
= / \$11,520

(W3)Apportionment of factory utilities:

Sewing department / = / \$100,800  8,000/16,000
= / \$50,400
Ironing department / = / \$100,800  5,000/16,000
= / \$31,500
Finishing department / = / \$100,800  3,000/16,000
= / \$18,900

(W4)Apportionment of factory rent:

Sewing department / = / \$92,160 8,000/16,000
= / \$46,080
Ironing department / = / \$92,160  5,000/16,000
= / \$28,800
Finishing department / = / \$92,160  3,000/16,000
= / \$17,280

(W5)Apportionment of factory canteen expenses:

Sewing department / = / \$72,000  60/100
= / \$43,200
Ironing department / = / \$72,000  30/100
= / \$21,600
Finishing department / = / \$72,000  10/100
= / \$7,200

Predetermined overhead absorption rates for the production departments:

Sewing department / = / \$603,520 ÷ 40,000
= / \$15.09 per machine hour / 0.5
Ironing department / = / \$742,220 ÷ 35,000
= / \$21.21 per direct labour hour / 0.5
Finishing department / = / \$313,140 ÷ 15,000
= / \$20.88 per direct labour hour / 0.5

(1.5 marks)

(c)

Job No. 344: / \$
Direct materials (\$20,000 + \$36,000) / 56,000
Direct labour (\$4,000 + \$6,400 + \$800) / 11,200
Overheads: / Sewing department (50  \$15.09) / 754.5
Ironing department (100  \$21.21) / 2,121
Finishing department (15  \$20.88) / 313.2
Total manufacturing costs / 70,388.7 / 0.5
Mark-up (50%) / 35,194.35
Selling price / 105,583 / 0.5

(1 mark)

SECTION C

7(a) (i)

Oscar Ltd
Income Statement for the year ended 30 June 2014 / 0
\$ / \$
Sales / 3,620,000 / 0.25
Less / Cost of goods sold:
Opening inventory / 370,644 / 0.25
Add / Purchases / 1,128,000 / 0.25
Carriage inwards / 5,200 / 0.25
1,503,844
Less / Closing inventory / 349,900 / 1,153,944 / 0.25
Gross profit / 2,466,056 / 0.25
Dividend income (\$50,000 + \$5,000) / 55,000 / 0.5
Decrease in allowance for doubtful accounts
[\$33,900(\$678,0002%)] / 20,340 / 0.5
Discounts received / 1,255 / 76,595 / 0.25
2,542,651
Less / Expenses:
Auditfees / 44,000 / 0.25
Bad debts / 11,500 / 0.25
Carriage outwards / 2,560 / 0.25
Debenture interest / 11,250 / 0.75
[(\$200,000  5%) + (\$100,000  5%3/12)]
Rent and rates (\$75,400  \$9,000) / 66,400 / 0.25
Motor expenses / 55,630 / 0.5
Wages and salaries (\$640,830 + \$3,600) / 644,430 / 0.5
Depreciation: / Plant and machinery (\$3,882,00020%) / 776,400 / 0.5
Motor vehicles [(\$856,000  \$327,200)  10%] / 52,880 / 1,665,050 / 0.5
Net profit / 877,601
Less / Profits tax / 145,000 / 0.25
Profit after tax / 732,601
Add / Retained earnings brought forward / 76,500 / 0.25
809,101
Less / Appropriations:
Transfer to general reserve / 40,000 / 0.25
Preferencedividends: / Interim / 30,000 / 0.25
Final [(\$1,000,000 6%1/2) + / 34,500 / 0.75
(\$150,000 6%1/2)]
Ordinary dividends: / Interim / 45,000 / 0.25
Final [(\$3,000,000 ÷ \$2)  \$0.08] / 120,000 / 269,500 / 0.75
Retained earnings carried forward / 539,601 / 0.25

(9.5 marks)

(ii)

Oscar Ltd
Statement of Financial Position as at 30June 2014 / 0
\$ / \$ / \$
Accumulated / Net book
Non-current assets / Cost / depreciation / value
Plant and machinery / 3,882,000 / 1,759,200* / 2,122,800 / 0.75
Motor vehicles / 856,000 / 380,080** / 475,920 / 0.75
4,738,000 / 2,139,280 / 2,598,720
Long-term investments, at cost / 605,000 / 0.25
Current assets
Inventory / 349,900 / 0.25
Trade receivables / 678,000 / 0.25
Less / Allowance for doubtful debts (\$678,0002%) / 13,560 / 664,440 / 0.5
Prepaid expenses / 9,000
Accrued revenue / 5,000 / 0.25
Cash at bank / 2,181,891 / 0.25
3,210,231
Less / Current liabilities:
Trade payables / 355,000 / 0.25
Accrued expenses[\$3,600 + (\$200,000 5%1/2) + (\$100,000  5%3/12)] / 9,850 / 0.75
Tax payable / 145,000 / 509,850 / 0.25
Net current assets / 2,700,381
5,904,101
Less / Non-current liabilities:
5% debentures (\$200,000 + \$100,000) / 300,000 / 0.5
5,604,101
Financed by:
Capital and reserves
Preference share capital [\$1,000,000 + (150,000 \$1)] / 1,150,000 / 0.5
Ordinary share capital / 3,000,000 / 0.25
Share premium [\$250,000 + (150,000 \$0.8)] / 370,000 / 0.5
General reserve (\$350,000 + \$40,000) / 390,000 / 0.5
Retained earnings / 539,601 / 0.25
Proposed dividends (\$34,500 + \$120,000) / 154,500 / 0.5
5,604,101

(7.5 marks)

*\$982,800 + \$776,400 = \$1,759,200

**\$327,200 + \$52,880 = \$380,080

(b)A reserve is an amount set aside out of profits that is not used to meet any liability. Thus, a reserve is not a future economic obligation. It is actually part of the undistributed profits of the business and belongs to shareholders. 1.5

A provision is a liability of uncertain timing or amount. This means the business has a present obligation arising from a past event, but the timing or amount of expenditure required for settlement has to be estimated. 1.5

(3 marks)

8(a)(i)Under absorption costing:

Breeze Ltd
Income Statement for the year ended 31 December 2014
\$ / \$
Sales (52,000 \$60) / 3,120,000 / 0.5
Less / Cost of goods sold:
Direct materials (54,000 \$5) / 270,000 / 0.5
Direct labour (54,000 \$8) / 432,000 / 0.5
Variable manufacturing overheads (54,000 \$6) / 324,000 / 0.5
Fixed manufacturing overheads / 1,350,000 / 0.5
2,376,000
Less / Closing inventory (\$2,376,000 2,000/54,000) / 88,000 / 2,288,000 / 1
Gross profit / 832,000 / 0.5
Less / Marketing costs: / Variable (\$3,120,000 10%) / 312,000 / 0.5
Fixed / 300,000 / 612,000 / 0.5
Net profit / 220,000 / 0.5

(5.5 marks)

(ii)Under marginal costing:

Breeze Ltd
Income Statement for the year ended 31 December 2014
\$ / \$
Sales (52,000 \$60) / 3,120,000 / 0.5
Less / Variable cost of goods sold:
Direct materials (54,000 \$5) / 270,000 / 0.5
Direct labour (54,000 \$8) / 432,000 / 0.5
Variable manufacturing overheads (54,000 \$6) / 324,000 / 0.5
1,026,000
Less / Closing inventory (\$1,026,000 2,000/54,000) / 38,000 / 988,000 / 1
Product contribution margin / 2,132,000
Less / Variable marketing costs (\$3,120,000 10%) / 312,000 / 0.5
Total contribution margin / 1,820,000 / 0.5
Less / Fixed manufacturing overheads / 1,350,000 / 0.5
Fixed marketing costs / 300,000 / 1,650,000 / 0.5
Net profit / 170,000 / 0.5

(5.5 marks)

(b)Difference in net profit

= \$220,000 (under absorption costing) \$170,000 (under marginal costing)

= \$50,000 (higher under absorption costing) 1

The difference in net profit arises because the closing inventory is valued differently under the two approaches. Under absorption costing, a portion of fixed manufacturing costs are absorbed in the closing inventory. However, under marginal costing, all fixed manufacturing costs are treated as period costs and written off in the current period. Only variable manufacturing costs are included in the closing inventory. 2

Reconciliation of the difference in net profit for the year ended
31 December 2014
\$
Net profit under absorption costing / 220,000 / 0.5
Less / Fixed manufacturing overheads included in the closing inventory (W1) / 50,000 / 1
Net profit under marginal costing / 170,000 / 0.5

(5 marks)

Workings:

(W1)(54,000 52,000) (\$1,350,000 ÷ 54,000) = 2,000 \$25 = \$50,000

(c)Unit variable costs for Product X:

Per unit: / \$
Direct materials / 5
Direct labour / 8
19

No additional fixed costs will be incurred under order option 1 as the special order is for 500 units only.

Order option 1 / Order option 2
\$ / \$
Contribution margin from the special order
Under order option 1 [500 (\$58\$19)] / 19,500 / 1
Under order option 2 [700 (\$56\$19)] / 25,900 / 1
Less Additional fixed costs incurred / — / 5,000 / 0.5
Incremental profit / 19,500 / 20,900 / 0.50.5

Breeze Ltd should accept order option 2 as it can gain an additional profit of \$1,400 (= \$20,900 \$19,500). 0.5

END OF PAPER 2A

Mock Exam Paper (Mar 2014):Paper 2A (Answers)

p.1© Pearson Education Asia Limited 2014