1.On 31 December 2010, the bank statement of Winter Company did not agree with the cash book balance of $1000 (Dr). On checking the cash book with the bank statement, he discovered the following:
(i)Some cheques of $1440 issued by Peter were returned by the bank and marked as “wrong signature-refer to drawer”. No entries have been made.
(ii)The following cheques were found to be unpresented on 31 December 2010.
Date / Cheque No. / Amount2009 / $
Sept 28 / 1120 / 8 800
Dec 7 / 1180 / 4 000
2010
Jun 12 / 1210 / 1 000
Dec 30 / 1600 / 7 000
(iii)The receipt side of the cash book had been overcast by $100;
(iv)A sum of $9000 was deposited to the bank on 30 December 2009 but had not been credited by the bank.
(v)A cheque of $500 received from a customer was mistakenly credited by the bank as $5000.
(vi)No entries have been made regarding an autopay item of $1500 for an electricity bill.
(vii)A credit transfer of $19000 from Nicole had not been recorded.
(viii)The bank had wrongly charged overdraft interest of $900.
(ix)The bank balance as at 30 November of $1500 (Dr) in the cash book was wrongly brought down as $5100 (Cr).
REQUIRED:
(a)Prepare an updated cash book showing the corrected balance at 31 December 2010.
(b)Prepare a bank reconciliation statement as at 31 December 2010, staring with the adjusted cash book balance.
(b)Apart from a wrong signature, under what conditions would the bank return a cheque?
(a)
Cash Book (bank column only)$ / $
Balance b/f / 1,000 / Peter – dishonored cheque (i) / 1,440
Accounts payable – stale cheque (ii) / 13,800 / Suspense (iii) / 100
Nicole – credit transfer / 1,900 / Electricity – autopay (vi) / 1,500
Suspense (ix) (1500 + 5100) / 6,600 / Balance c/f / 20,260
23,300 / 23,300
(b)
Bank reconciliation statement as at 30April 2011$ / $
Balance as per adjusted cash book / 20,260
Add: Unpresented cheques– No. 1600 (ii) / 7,000
Bank error (v) / 4,500 / 11,500
31,760
Less: Uncreditedcheque (iv) / 9,000
Bank error (viii) / 900 / 9,900
Balance as per bank statement / 21,860
(c) / —Insufficient money to make the payment
—Post-dated cheque
—Stale cheque
—The cheque is not dated
—The amount in numbers does not match that in words
(Total 7 marks)
2.Ocean Limited owns the following non-current assets as at 1 January 2010:
(i)On 1 October 2010, an old motor vehicle costing $350,000 with a net book value of $100,000 as at 1 January 2010 was trade-in for a new one. A trade-in allowance of $9,000 was given. The list price of a new vehicle is $400,000 and a trade discount of 10% was allowed. Ocean Limited paid $2,400 for annual license fee, $10,000 for installing an air-conditioning system in the motor vehicle and $3,000 for freight charges. The scrap value of the new machine is $4,000. Ocean Limited had only credited sales account for $9,000. No other entries have been made.
(ii)Ocean Limited adopts the following depreciation policies for its non-current assets:
Motor vehicle – 20% on reducing balance method per annum
REQUIRED:
(a)Calculate the cost of new vehicle to be capitalized.
(b)Prepare journal entries to correct the error abovefor the year ended 31 December 2010.
(Total: 7 marks)
(a)
$Purchases price ($400,000 x 90%) / 360,000
Air-conditioning system / 10,000
Freight charges / 3,000
Cost of motor vehicle / 373,000
(b)
JournalDebit / Credit
$ / $
Sales / 9,000
Suspense / 9,000
Accumulated depreciation – Motor vehicle [$100,000 x 20% x 9/12 + ($350,000 $100,000)] / 265,000
Motor vehicle – trade-in allowance / 9,000
Profit and loss – Loss on disposal / 76,000
Motor vehicle / 350,000
Motor vehicle ($373,000 $9,000) / 364,000
License fee ($2,400 x 3/12) / 600
Prepayment ($2,400 $600) / 1,800
Bank / 366,400
Depreciation – Motor vehicle ($373,000 x 20% x 3/12) / 18,650
Accumulated depreciation – Motor vehicle / 18,650
3.Tiger Limited manufactures desks and chairs. The budgeted cost and revenue data of these products are as follows:
Chair / DeskExpected selling price / $300 per unit / $150 per unit
Direct labour hour ($50/hour) / 1.5 hours per unit / 0.5 hour per unit
Direct material cost ($60/100kg) / 150 kgper unit / 75 kgper unit
Variable selling expenses / $25 per unit / $15 per unit
Monthly factory rent / $56,000 / $56,000
Factory manager’s monthly salary / $35,000 / $35,000
Administration cost per month / $20,500 / $30,000
Monthly depreciation / $5,800 / $4,500
Annual production and sales volume / 48,000 units / 24,000 units
Fixed production overhead is absorbed at 140% of direct production cost, which is based on the budgeted production volume. Assume all production and sales occur evenly throughout the year.
REQUIRED:
(a)What is prime cost? Identify all types of direct costs mentioned above.
(b)Calculate the budgeted variable cost and budgeted contribution per unit of chair and desk.
(c)Calculate the budgeted monthly breakeven point in sales volume (to the nearest unit) for each product.
(a) / Prime cost is the total of all direct manufacturing costs.Direct materials and direct labour wages are the examples of direct costs.
(b) / Chair / Desk
$ / $
Direct materials / 150 x $60/100 / 90 / 75 x $60/100 / 45
Direct labour cost / 1.5 x $50 / 75 / 0.5 x $50 / 25
Variable selling expenses / 25 / 15
Variable cost per unit / 190 / 85
Chair / Desk
$ / $
Sales / 300 / 150
Less: Variable costs / 190 / 85
Contribution / 110 / 65
(c) / Chair / Desk
$ / $
Administration cost / 20,500 / 30,000
Monthly factory rent / 56,000 / 56,000
Factory manager’s monthly salary / 35,000 / 35,000
Monthly depreciation / 5,800 / 4,500
Fixed production overhead / 165 x 1.4 x 48,000÷ 12 / 924,000 / 70 x 1.4 x 24,000÷ 12 / 196,000
Total fixed cost / 1,041,300 / 321,500
Monthly breakeven point of chairs = $1,041,300 / $110
= 9,466 units
Monthly breakeven point of desks = $321,500 / $65
= 4,946 units
4.The following information has been obtained from the records of Big Bang Limited for the year ended 31 March 2005:HKCEE (2005,3)
$Purchases ledger control account balance at 1 April 2004 / 175,578
Credit purchases / 1,607,000
Cash purchases / 34,688
Returns on credit purchases / 171,035
Payments to suppliers by cheque / 1,195,500
Discount received / 29,800
You are required to:
(a)Prepare the purchases ledger control account for the year ended 31 March 2005.
The list of purchases ledger balances showed a net loss of $387,223 at 31 March 2005. As this amount did not agree with the control account balance, subsequent checking of the records revealed the following:
(i)A cheque payment of $5,000 to Castle Limited had been correctly entered in the cash book but no entry was made in the supplier’s account.
(ii)Goods with a gross invoice price of $2,000 were returned to a supplier on 31 March 2005. No entry had been made in the books in respect of this transaction. These goods were originally purchased at a trade discount of 10%.
(iii)The purchases day book had been overcast by $6,000.
(iv)A cheque payment of $8,000 to Sue Limited, a supplier, had been correctly entered in the cash book but incorrectly credited to Susan Limited’s account in the sales ledger.
(v)An amount of $900 owed by Jean Limited, a supplier, was recorded as a contra entry in the purchases ledger. Entries had not been made in the control accounts.
(vi)A credit balance of $2,560 had been wrongly treated as a debit balance in the list of purchases ledger balances.
(vii)A purchase of furniture for $10,000 had been recorded as a credit purchase of goods.
You are required to:
(b)Draw up the purchases ledger control account to show the necessary adjustments for items (i) to (vii), starting with the balance arrived at in (a) above.
(c)Prepare a statement reconciling the net total of the purchases ledger balances with the updated purchases ledger control account balance.
(Total 8 marks)
4 (a)
Purchases ledger control$ / $
Purchases returns / 171,035 / Balance b/d / 175,578
Bank / 1,195,500 / Credit purchases / 1,607,000
Discounts received / 29,800
Balance c/d / 386,243
1,782,578 / 1,782,578
(b)
Purchases ledger control$ / $
Purchases returns (ii)($2,000 x 90%) / 1,800 / Balance b/d / 386,243
Purchases day book overcast (iii) / 6,000
Contra with sales ledger (v) / 900
Purchase of furniture (vii) / 10,000
Balance c/d / 367,543
386,243 / 386,243
(c)
Statement reconciling the balances total of purchases ledger and the purchases ledger control account balance as at 31 March 2005$ / $
Net total as per purchases ledger / 387,223
AddCredit balance wrongly listed as debit (vi) ($2,560 x 2) / 5,120
392,343
LessCheque payment omitted (i) / 5,000
Purchases returns omitted (ii) ($2,000 x 90%) / 1,800
Payment to supplier incorrectly credited to sales ledger (iv) / 8,000
Purchase of furniture recorded as credit purchase of goods (vii) / 10,000 / 24,800
Updated purchases ledger control account balance / 367,543
(Total 8 marks)
5.Sue company manufactures product X. On 31 December 2010, Sue is not satisfied with its total sales volume of 55,000 units in 2010 and is considering the following two ways to improve its profitability:
Alternative 1
The marketing manager suggests launching a promotional campaign which would incur $3,500 per month. Besides, sales commission of $5 per unit would be paid to salespeople. It is expected that annual sales volume in 2011 would be 40% more than that in 2010. No additional production overheads would be incurred.
Alternative 2
The operations manager suggests reducing 10% of product X’s selling price. It is estimated that its annual sales volume will increase by 30,000 units. Moreover, the manager decides to purchase direct materials from one supplier only, which leads to a reduction of material cost of $4 per unit. A new machine costing $50,000 with an estimated useful life of 4 years and zero residual value would be purchased to improve the productivity and it will lower the labour cost of $2 per unit. The machine is depreciated on a straight line basis. No additional production overheads would be incurred.
It is given that the selling price of product X is $40 per unit and thetotal production costs of 55,000 units is $1,375,000. Fixed production overheads are $55,000.
REQUIRED:
(a)Prepare two separate statements showing the relevant costs and revenues for alternative 1 and 2. Advise which proposal Sue should adopt.
The management is also considering buying product X from a supplier at a price of $45 instead of producing it in 2011. Its budgeted annual production volume is 40,000 units. The historical cost and replacement cost of its direct materials is $3 per kg and $5 per kg respectively. The materials are in constant use and there is sufficient stock in hand. Due to a shortage of labour supply, the piece-rate wage will increase by $10. If the company chooses to buy product X, the factory used for its production will be let to Ozone Ltd for one year at an annual rental of $450,000. Besides, a custom-made machine will a net book value of $10,000 would have no use and be disposed at a value of $6,000.
Some of production costs of product X are as follows:
Direct materials: 5 kg per unit
Piece-rate wage: $5
REQUIRED:
(b)Based on the financial information above, advise whether the management should buy from the supplier.
(c)State one factor that the company has to consider in deciding whether product X should be purchased.
(a)Alternative 1:
$ / $Sales [$40 x 55,000 x 140%) / 3,080,000
Less: Variable costs ($24 x 55,000 x 140%) / 1,848,000
Sales commission ($5 x 55,000 x 1.4) / 385,000 / 2,233,000
Contribution / 847,000
Less: Fixed production overheads / 55,000
Promotional expenses ($3,500 x 12) / 42,000 / 97,000
Net profit / 750,000
Variable cost per unit = ($1,375,000 $55,000) / 55,000 = $24 per unit
Alternative 2:
$ / $Sales [$40 x 0.9 x (55,000 + 30,000)] / 3,060,000
Less: Variable costs [($24 $4 $2) x (55,000 + 30,000)] / 1,530,000
Contribution / 1,530,000
Less: Fixed production overheads / 55,000
Depreciation of machine ($50,000 / 4) / 12,500 / 67,500
Net profit / 1,462,500
The management should adopt alternative 2 as its net profit is greater than that of alternative 1.
(b)
Make / Buy$ / $
Direct materials ($5 x 5 x 40,000) / 1,000,000 / —
Direct labour [($5 + $10) x 40,000] / 600,000 / —
Variable overheads [($24 $3 x 5 $5) x 40,000] / 160,000 / —
Fixed overheads / 55,000 / 55,000
Rental revenue forgone / — / (450,000)
Disposal value of a machine forgone / — / (6,000)
Purchase costs (40,000 $45) / — / 1,800,000
Total costs / 1,815,000 / 1,399,000
Since the purchase price is lower than the relevant cost of production, the company should buy
product X instead of producing it.
(c) / Factors:
—The quality of product X purchased from the supplier
—The possibility of any increase in price of product X in the future
—The cease of production could lead to redundancy payments which may be greater than the
cost saved.
6.The trial balances of Fish Limited at 31 March 2011 did not agree and the difference was posted to suspense account. The draft net profit for the year was $159,620. After closing all the nominal accounts and preparing the draft income statement, subsequent investigation revealed the following:
(i)A debt of $500 already written off in the previous year has been collected in the current year. The only entry made was debited bank account and credited accounts receivable account.
(ii)The closing stock as at 31 March 2010 was overcast by $1,050.
(iii)Discounts allowed of $1,850 had been credited to the discounts allowed account and debited to the accounts receivable’s account.
(iv)A bank overdraft of $3,190 had been listed in the trial balance as a debit balance.
(v)A total in the purchases day book had been carried forward as $11,950 instead of $11,590.
(vi)A free sample had been sent to Shark Limited and recorded as credit sales at a selling price of $26,000. The margin of the sample is 30% on sales.
(vii)A credit note for $375 received from a supplier had been posted to the wrong side of his account.
REQUIRED:
(a)Prepare journal entries to correct the errors above. (Narration is not required)
(b)Prepare a statement to correct net profit for the year ended 31 March 2011.
(c)Explain two underlying accounting concepts in the treatment of item (vi).
(a)
JournalDebit / Credit
$ / $
(i) / Accounts receivable / 500
Profit and loss : Bad debts recovered / 500
(ii) / Profit and loss : Closing inventory / 1,050
Inventory / 1,050
(iii) / Profit and loss : Discounts allowed ($1,850 x 2) / 3,700
Accounts receivable / 3,700
(iv) / Suspense ($3,190 x 2) / 6,380
(v) / Suspense ($11,950 $11,590) / 360
Profit and loss : Purchases / 360
(vi) / Profit and loss: Sales / 26,000
Shark Limited / 26,000
Profit and loss: Promotional expense / 18,200
Profit and loss: Purchases ($26,000 x 70%) / 18,200
(vii) / Accounts payable ($375 x 2) / 750
Suspense / 750
(b)
Fish LimitedStatement to calculate the corrected net profit for the year ended 31 March 2011
$ / $
Net profit before adjustments / 159,620
Add : Bad debts recovered omitted (i) / 500
Purchases overcast (v) / 360
Inventory taking omitted (vi) / 18,200 / 19,060
178,680
Less: Closing inventory overstated (ii) / 1,050
Discounts allowed recorded on the wrong side (iii) / 3,700
Sales overstated (vi) / 26,000
Promotional expense omitted (vi) / 18,200 / 48,950
Corrected net profit / 129,730
(c) / Materiality concept
—An item is material if its non-disclosure and omission would be likely to distort the view given by
the accounts.
—A free sample of $26,000 is considered material in the sense that it will increase expense, lower
the profit significantly and thus affect the decision made by users of financial statements.
Matching concept
—Revenues generated should be matched with expenses incurred for the same period of time.
—Since free samples are not supposed for sale so it should not be included in the sales account
and cost of goods sold.
7.Abby, Billy and Cathy were trading in partnership for many years, sharing profit and losses in the ratio of 2 : 1 : 2 respectively. According to the partnership deed, Abby, Billy and Cathy would receive a salary of $30,000, $24,000 and $18,000 per annum respectively.
The trial balance as at 31 March 2011 was as follows:
$ / $Capital – Abby / 400,000
– Billy / 350,000
– Cathy / 400,000
Current – Abby / 50,000
– Billy / 30,000
– Cathy / 20,000
Drawings – Abby / 15,000
– Billy / 16,000
– Cathy / 8,000
Net Profit before appropriations / 55,500
Accounts receivable / 80,000
Salary – Abby / 5,000
– Cathy / 8,000
10% loan: Abby (borrowed on 1 October 2009) / 150,000
12% loan: Billy (borrow on 1 April 2010) / 260,000
On 31 March 2011, Billy retired on the following terms:
(i)Inventory was revalued downwards by $18,000
(ii)Goodwill was to be valued at three years’ purchase of the average profits of the last two years. The net profits before loan interest of 2009 and 2010 were $15,000 and $19,000 respectively. It was agreed than no account for goodwill was to be maintained in the books.
(iii)An allowance for bad debts should be made at 4% accounts receivable instead of 6%.
(iv)A customer who owned the partnership $15,000 had declared bankrupt in November but no entry had been made to record it.
(v)A motor vehicle was revalued upwards by $55,000.
(vi)Billy agreed that the amount due to him be considered as a loan to the partnership. The loan interest is 5% per annum.
(vii)Abby and Cathy were to share the profits and losses in the ratio of 1 : 2 respectively.
(viii)After all adjustments, both Abby and Cathy’s capital should remain at $400,000. Any surplus or deficit was to be transferred to or from the individual’s current account.
REQUIRED:
(a)Draw up a revaluation account.
(b)Draw up Abby, Billy and Cathy’s capital accounts for the year 2011.
(c)Draw up Abby, Billy and Cathy’s current accounts for the year 2011.
(a)
Revaluation
$ / $ / $Inventory / 18,000 / Motor vehicle / 55,000
Profit on revaluation
Capital – Abby (2/5) / 14,800
–Billy (1/5) / 7,400
–Cathy (2/5) / 14,800 / 37,000
55,000 / 55,000
(b)
Capital
Abby / Billy / Cathy / Abby / Billy / Cathy$ / $ / $ / $ / $ / $
Goodwill / 13,250 / — / 26,500 / Balances b/d / 400,000 / 350,000 / 400,000
Current (Balance fig) / 17,450 / 32,860 / 4,200 / Goodwill / 15,900 / 7,950 / 15,900
Loan from Billy / — / 592,490 / — / Revaluation profit / 14,800 / 7,400 / 14,800
Balances c/d / 400,000 / — / 400,000 / Loan from Billy / — / 260,000 / —
430,700 / 625,350 / 493,000 / 430,700 / 625,350 / 430,700
Goodwill: ($15,000 + $19,000 $150,000 x 10% x 0.5)/2 x 3 = 39,750
Abby / Billy / Cathy
Old ratio (2 : 1 : 2) / 15,900 / 7,950 / 15,900
New ratio (1 : 2) / 13,250 / — / 26,500
(c)
Current
Abby / Billy / Cathy / Abby / Billy / Cathy$ / $ / $ / $ / $ / $
Balances b/d / — / 30,000 / — / Balances b/d / 50,000 / — / 20,000
Drawings / 15,000 / 16,000 / 8,000 / Salary / 30,000 / 19,000 / 10,000
Share of loss (W1) / 11,720 / 5,860 / 11,720 / Capital / 17,450 / 32,860 / 4,200
Balances c/d / 70,730 / — / 14,480
97,450 / 51,860 / 34,200 / 97,450 / 51,860 / 34,200
Salary for Billy = $24,000 $5,000 = $19,000
Salary for Cathy = $18,000 $8,000 = $10,000
Profit and Loss Appropriation
$ / $ / $
Salary to partner –Abby / 30,000 / Profit and loss (net profit) / 42,700
–Billy / 24,000 / Share of loss– Abby (2/5) / 11,720
–Cathy / 18,000 / – Billy (1/5) / 5,860
– Cathy (2/5) / 11,720 / 29,300
72,000 / 72,000
Decrease in allowance = [$80,000 x 6% ($80,000 $15,000) x 4%] = $2,200
Adjusted Net profit = $55,500 + $2,200 $150,000 x 10% = $42,700
SECTION C
Answer ONE question in this section.
8.Terry Limited operates two production departments and one service department. The following information relates to 2010:
(i)Direct cost of per unit product:
Direct material / $20Direct labour hour ($75/hour) / 40 mins
(ii)Budgeted annual fixed production overhead:
ServiceProduction department / department
Cutting / Moulding / Maintenance / Total
Basis / $ / $ / $ / $
Rent and rates / Floor area / ? / ? / ? / 60,000
Electricity / Floor area / ? / ? / ? / 24,000
Depreciation (straight line method) / Machine cost / ? / ? / ? / 390,000
Supervision / No. of empolyees / ? / ? / ? / 56,000
Light and heating / Floor area / ? / ? / ? / 36,000
(iii)Additional information extracted from the budget is shown below:
Cutting / Moulding / MaintenanceFloor area occupied (m2) / 3,000 / 5,000 / 2,000
Machine hour / 31,850 / 40,675 / 300
Labour hour / 1,000 / 850 / 200
Maintenance hour / 250 / 750 /
No. of empolyees / 1,500 / 500 / 800
Cost of machines / $12,000 / $55,000 / $63,000
(iv)Maintenance hour are used for maintenance cost apportionment.
(v)Machine hour are used as the bases for the allocation of fixed production overheads of the production department.
(vi)It is company’s policy that products would be sold at a mark-up of 100% on direct production cost for all products.
(vii)Actual annual production and sales were 9,000 units and 8,000 units respectively.
(viii)Actual variable selling expenses for product A were $8 per unit and fixed selling expenses for 2010 were $16,000.
(ix)Actual administration costs for 2010 amounting to $75,000, were fixed.
(x)Actual fixed production overhead costs for 2010 were $410,000.
REQUIRED:
(a)Prepare a budgeted fixed production overhead analysis sheet.
(b)Calculate the budgeted fixed overhead absorption rate for each of the production department.
Terry Limited decides that fixed production overheads are absorbed on the budgeted activity level. It is given that there are 4,000 units of opening stock on 1 January 2010 and the budgeted annual production volumes are 20,000 units. Assume that the unit production cost in 2009 and 2010 are the same.
REQUIRED:
(c)Prepare an income statement for the year ended 31 December 2010,
(1)using marginal costing method
(2)using absorption costing method
(d)Reconcile the profits calculated in (c)(1) and with that of (c)(2) for the year of 2010.
(e)Explain one difference between absorption costing and marginal costing.
8. (a)
ServiceProduction department / department
Cutting / Moulding / Maintenance
Basis / $ / $ / $
Rent and rates / Floor area / 18,000 / 30,000 / 12,000
Electricity / Floor area / 7,200 / 12,000 / 4,800
Depreciation / Machine cost / 36,000 / 165,000 / 189,000
Supervision / No. of empolyees / 30,000 / 10,000 / 16,000
Light and heating / Floor area / 10,800 / 18,000 / 7,200
Total overheads before reallocation / 102,000 / 235,000 / 229,000
reapportionment / Maintenance hour / 57,250 / 171,750 / (229,000)
Overheads after reallocation / 159,250 / 406,750 /
(b) / Predetermined overhead abruption rate for cutting department:
= $159,250/31,850
= $5 per machine hour
Predetermined overhead abruption rate for moulding department:
= $406,750/40,675
= $10 per machine hour
(c) (1)