SKHLeungKwaiYeeSecondary School

First Term Examination 2010/11

F.5BAFS (Accounting Module)

(MOCK PAPER)

11.1.2011

8:30 am – 11:00 am

Time allowed: 2.5 hours

This paper must be answered in English

Setter: WHF

Full Marks: 100

Instructions:

  1. Answer ALL questions.
  1. Write your answers on the answer sheets provided.
  1. Show your workings.

Question 1

Chan and Lee were in partnership sharing profits and losses in the ratio 3:2 respectively.The balance sheet as at 31 December 2010 was as follows:

Balance sheet as at 31 December 2010
$ / $
Non-current assets / 503,500
Current assets
Stock / 89,700
Trade receivable / 80,300
Bank / 43,100
213,100
Less: Current liabilities
Tradepayable / 93,100
Net current assets / 120,000
623,500
Financed by:
Capital accounts–Chan / 360,000
–Lee / 280,000 / 640,000
Current accounts–Chan / 13,102
–Lee / (29,602) / (16,500)
623,500

Chan decided to retire on 31 December 2010 and Wong was admitted as a partner on that date.

Additional information:

(i)Chan and Wongwere to share profits and losses equally.

(ii)The partnership agreement stated that in the event of a partner’s retirement, goodwill was to be valued at two years’ purchase of super profit.The calculation of super-profit was to be based on the averageprofits of the last three years.Theexpected rate of return was 15% on net tangible assets at 31 December 2010. The relevant profits were:

$
2008 / 134,210
2009 / 128,670
2010 / 141,265

No account for goodwill was to be maintained in the books.

(iii)No tangible assets needed to revalue.

(iv)Wong should pay in capital of $300,000.

(v)Chan was paid 80% of the amount outstanding and the balance was left as a loan to new partnership.

REQUIRED:

On 31 December 2010, upon the admission and retirement of the partners,

(a)prepare the capital accounts; (9 marks)

Unfortunately, on 1 January 2011, they have decided to cease trading after a dispute. The following transactions took place during the dissolution process:

(vi)One of the non-current assets was taken over by Chan at $200,000. The remaining non-current assets were sold for $320,000.

(vii)$74,500 was received from all debtors.

(viii)Stock was sold for $88,000 after deduction of commission and selling expenses of $9,000.

(ix)Outstanding debts were to be paid.

(x)Wong paid on behalf of the partnership realization expenses $4,200.

REQUIRED:

On 1 January 2011, upon the dissolution of the partnership, prepare

(b)the realization account, (6 marks)

(c)the capital accounts; and (5 marks)

(d)the bank account.(5 marks)

Question 2

Betty Limited is a wholesaler company with its financial year ends on 31 December. The following trial balance was extracted from its books as at 31 December 2010:

Dr / Cr
$ / $
Land and buildings / 1,800,000
Office equipment, at cost / 255,000
Motor vehicles, at cost / 460,000
Accumulated depreciation – Office equipment as at 1 January 2010 / 52,650
Accumulated depreciation – Motor vehicles as at 1 January 2010 / 184,000
Debtors / 291,500
Creditors / 351,200
Stock as at 1 January 2010 / 49,200
Cash at bank / 652,150
Interim preference dividend / 16,000
Interim ordinary dividend / 47,500
Bad debts / 16,500
Allowance for doubtful debts as at 1 January 2010 / 8,000
Directors’ fees / 95,000
Purchases and sales / 1,154,200 / 2,535,000
Returns / 30,000 / 23,000
Discounts / 8,100 / 9,300
Selling and distribution expenses / 52,000
Wages and salaries / 230,000
Rent and rates / 250,000
Interest income / 10,500
10% debentures (issued in 2006 and repayable in 2016) / 430,000
Debenture interest / 21,500
General reserves / 200,000
Share premium / 250,000
Retained profits / 25,000
950,000 Ordinary shares of $1 each, fully paid / 950,000
400,000 8% Preference shares of $1 each, fully paid / 400,000
5,428,650 / 5,428,650

Additional information:

(i)Stock-take as at 31 December 2010 showed a stock value of $47,300. In addition, goods with a selling price of$5,000 sent to customers on sale or return basis had been omitted from the stock-take figureand included as credit sales as well. The gross profit margin on goods sent on sale or returnbasis is 20%.

(ii)Depreciation was to be provided as follows:

Office equipment15% per annum on net book value

Motor vehicles20% per annum on cost

It’s the company’s policy to charge a full year’s depreciation in the year of acquisition but none in the year of disposal.

(iii)On 31 December 2010, accrued rent and rates and prepaid wages and salaries were $25,000 and$6,000 respectively.

(iv)Trade receivables include $4,000 for a customer who has gone into liquidation since the trial balance was prepared. It was to be written off as bad debt.

(v)Allowance for doubtful debts was to be maintained at 3% of the outstanding trade debtors.

(vi)Office equipment which was bought in 2008 for $60,000 was sold for $40,000. The cash proceeds was debited to bank and credited to sales account. No other entries had been made.

(vii)Profits tax for the year estimated to be $85,000.

(viii)On 1 September 2010, 250,000 ordinary shares were offered to the public at $1.3 per share, and $150,000 10% debentures were issued at 98. No entries had been made with respect to the share and debentures issue. Discount on debentures was to be written off evenly over 10 years. The new shares were also entitled to the proposed dividend for the year ended 31 December 2010. Interest on debentures was payable half yearly on 1 January and 1 July.

(ix)The directors decided to transfer $25,000 to the general reserves, distribute final dividendsto the preference shareholders and propose a final dividend of 3% on ordinary shares.

Required:

(a)Prepare anincome statement (for internal use) for the year ended 31 December 2010.

(20 marks)

(b)Prepare a balance sheet (for internal use) as at 31 December 2010.(15 marks)

Question 3

The financial statements of SKH Limited for the year ended 31 December 2010was as follows:

Balance sheet as at 31 December 2010
$’000 / $’000
Non-current assets
Plant and machinery / 8,000
Furniture and fixtures / 3,400 / 11,400
Current assets
Stock / 2,500
Accounts receivable / 2,500
Other debtors & Prepayments / 400
Cash at bank / 600
6,000
Less: Current liabilities
Accounts payable / 2,500
Accruals / 500
Tax payable / 420
3,420
Net current assets / 2,580
13,980
Less: Non-current liabilities
12% debentures / 4,000
9,980
Financed by:
Share capital
Ordinary shares ($1 each) / 4,500
10% Preference shares ($1 each) / 500 / 5,000
Reserves
Share premium / 1,000
Profit and loss / 3,030
Dividend payable / 950 / 4,980
9,980
Income statement for the year ended 31 December 2010
$’000
Sales / 15,500
Less: Cost of sales
Opening stock / 2,300
Add: Purchase / 6,700
9,000
Less: Closing stock / 2,500 / 6,500
Gross profit / 9,000
Less: expenses / 4,420
Operating profit / 4,580
Less: interest / 480
Profit before taxation / 4,100
Taxation / 800
Profit after tax / 3,300
Preference dividend / 50
Profit available for ordinary shareholders / 3,250
Ordinary dividend / 1,200
Retained profit / 2,050
Retained profit b/f / 980
Retained profit c/f / 3,030

Additional information:

The market price per ordinary share at 31 December 2010 for SKH Ltd was $5.81.

REQUIRED:

(a)Calculate the following ratios for the year ended31 December 2010 to one decimal place:

(i)Gross profit ratio

(ii)Net profit ratio (using operating profit)

(iii)Return on capital employed

(iv)Return on shareholders’ equity

(v)Current ratio

(vi)Quick ratio

(vii)Days’ sales in accounts receivable

(viii)Days’purchases in accounts payable

(ix)Days’ inventory on hand

(x)Debt to equity ratio

(xi)Interest cover

(xii)Asset turnover

(xiii)Earning per share

(xiv)Dividend cover

(xv)Price-earnings ratio(30 marks)

(b)Briefly explain the meanings of the following ratios:

(i)Days’ sales in accounts receivable

(ii)Debt to equity ratio

(iii)Interest cover

(iv)Dividend cover

(v)Price-earnings ratio(10 marks)

END OF PAPER

SKHLeungKwaiYeeSecondary School

First Term Examination 2010/11

F.5 Business, Accounting and Financial Studies(MOCK PAPER)

Suggested Answers

Question 1

(a)

(workings)

Goodwill = {[($134,210 + 128,670 + 141,265) 3] –623,500 15%}  2 = 82,380 (1.5)

Capital accounts
Chan / Lee / Wong / Chan / Lee / Wong
$ / $ / $ / $ / $ / $
GW write off / 41,190 / 41,190 / 1 / Bal b/d / 360,000 / 280,000 / 1
Current / 29,602 / 1 / Goodwill / 49,428 / 32,952 / 1
Bank / 226,680 / 1 / Bank / 300,000 / 0.5
Loan / 56,670 / 1
Bal c/f / 368,238 / - / 258,810 / 1
409,428 / 312,952 / 300,000 / 409,428 / 312,952 / 300,000

(b)

Realization
$ / $
Non-current assets / 503,500 / 0.5 / Capital – Chan / 200,000 / 0.5
Stock / 89,700 / 0.5 / Bank – Non-current assets / 320,000 / 0.5
Account receivables / 80,300 / 0.5 / Bank –Trade receivables / 74,500 / 0.5
Realization expenses / 4,200 / 0.5 / Bank – Stock / 79,000 / 0.5
Capital – Chan / 2,100 / 1
Capital – Wong / 2,100 / 1
677,700 / 677,700

(c)

Capital
Chan / Wong / Chan / Wong
$ / $ / $ / $
Realization / 200,000 / 0.5 / Bal b/f / 368,238 / 258,810 / 1
Realization / 2,100 / 2,100 / 1 / Realization expenses / 4,200 / 0.5
Bank / 179,240 / 260,910 / 1 / Current / 13,102 / 1
381,340 / 263,010 / 381,340 / 263,010

(d)

Bank
$ / $
Bal b/f / 43,100 / 0.5 / Capital –Chan / 226,680 / 0.5
Capital –Wong / 300,000 / 0.5 / Trade payable / 93,100 / 0.5
Realization– Non-current assets / 320,000 / 0.5 / Loan from Lee / 56,670 / 0.5
Realization–Trade receivables / 74,500 / 0.5 / Capital –Chan / 179,240 / 0.5
Realization – Stock / 79,000 / 0.5 / –Wong / 260,910 / 0.5
816,600 / 816,600

Question 2(a)

Betty Limited
Income statement for the year ended 31 December 2010
$ / $ / $
Sales ($2,535,000 – 5,000– 40,000) / 2,490,000 / 1
Less: Returns inwards / 30,000 / 0.5
2,460,000
Less: Cost of goods sold
Opening stock / 49,200 / 0.5
Purchases / 1,154,200 / 0.5
Less: Returns outwards / 23,000 / 1,131,200 / 0.5
1,180,400
Less: Closing stock ($47,300 + 5,000  80%) / 51,300 / 1,129,100 / 1
Gross profit / 1,330,900
Add: Discounts received / 9,300 / 0.5
Interest income / 10,500 / 19,800 / 0.5
1,350,700
Less: Expenses
Bad debts ($16,500 + 4,000) / 20,500 / 1
Directors’ fees / 95,000 / 0.5
Discounts allowed / 8,100 / 0.5
Selling and distribution expenses / 52,000 / 0.5
Wages and salaries ($230,000 – 6,000) / 224,000 / 1
Rent and rates ($250,000 + 25,000) / 275,000 / 1
Debentures interest ($430,000  10% + 150,000  10% 4/12) / 48,000 / 1
Depreciation – Office equipment ($255,000 – 52,650–60,000  0.852)  15% / 23,850 / 1.5
Depreciation – Motor vehicles ($460,000 20%) / 92,000 / 0.5
Loss on disposal ($60,000  0.852–40,000) / 3,350 / 1
Increase in allowance for bad debts ($291,500 – 5,000– 4,000)  3% – 8,000 / 475 / 1.5
Discounts on debentures ($150,000  0.02  1/10 4/12) / 100 / 842,375 / 1
Net profit / 508,325
Less: Profit tax / 85,000 / 0.5
423,325
Add: Retained profit b/f / 25,000 / 0.5
448,325
Less: Appropriation
Transfer to general reserve / 25,000 / 0.5
Preference share dividends – paid / 16,000 / 0.5
– proposed / 16,000 / 0.5
Ordinary share dividends – paid / 47,500 / 0.5
– proposed (1,200,000  3%) / 36,000 / 140,500 / 0.5
Retained profits c/f / 307,825 / 0.5

(b)

Betty Limited
Balance sheet as at 31 December 2010
$ / $ / $
Non-current assets / Cost / Acc.
Dep / NBV
Land and buildings / 1,800,000 / 1,800,000 / 0.5
Office equipment / 195,000 / 59,850 / 135,150 / 2
Motor vehicles / 460,000 / 276,000 / 184,000 / 1
2,119,150
Current assets
Stock / 51,300 / 0.5
Debtors / 282,500 / 0.5
Less: Allowance for bad debts / 8,475 / 274,025 / 0.5
Prepayment / 6,000 / 0.5
Cash at bank ($652,150 + 250,000  1.3 + 150,000  0.98) / 1,124,150 / 1
1,455,475
Less: Current liabilities
Creditors / 351,200 / 0.5
Accruals ($25,000 + 26,500) / 51,500 / 1
Tax payable / 85,000 / 487,700 / 0.5
967,775
3,086,925
Less: Long term liabilities
10% Debentures / 580,000 / 1
Less: Discounts on debentures ($3,000 –100) / 2,900 / 577,100 / 1
2,509,825
Financed by:
1,200,000 ordinary shares of $1 each / 1,200,000 / 0.5
400,000 5% preference shares of $1 each / 400,000 / 0.5
1,600,000
Reserves
Share premium ($250,000 + 75,000) / 325,000 / 1
General reserves ($200,000 + 25,000) / 225,000 / 1
Retained profits / 307,825 / 0.5
Proposed dividends / 52,000 / 909,825 / 1
2,509,825

Question 3

(a)

(i) / Gross profit ratio / Gross profit  Sales
9,00015,500 100% / 58.1% / 2
(ii) / Net profit ratio / Net profit  Sales
4,580 15,500  100% / 29.5% / 2
(iii) / Return on capital employed / PBIT Capital employed
4,580 (4,000 + 9,980) 100% / 32.8% / 2
(iv) / Return on shareholders’ equity / Profit available for ordinary shareholders  Shareholders’ fund
3,250(4,500 + 4,980) / 34.3% / 2
(v) / Current ratio / Current assets  Current liabilities
6,000  3,420 / 1.8 / 2
(vi) / Quick ratio / (Current ratio – Inventories)  Current liabilities
($6,000 – 2,500)  3,420 / 1.0 / 2
(vii) / Days’ sales in accounts receivable / Accounts receivable  Sales  365 days
2,500  15,500  365 / 58.9 / 2
(viii) / Days’ purchases in accounts payable / Accounts payables  Purchases  365 days
2,500 6,700  365 / 136,2 / 2
(ix) / Days’ inventory on hand / Average inventory  COGS  365 days
(2,300 + 2,500) / 26,500  365 days / 134.8 / 2
(x) / Debt to equity ratio / Long-term debt Equity
(4,000 + 500)  (4,500 + 4,980)  100% / 47.5% / 2
(xi) / Interest cover / PBIT  Interest expense
4,580480 / 9.5 / 2
(xii) / Asset turnover / Sales  Assets employed
15,500  (11,400 + 6,000)  100% / 89.1% / 2
(xiii) / EPS / Profit available for ordinary shareholders  No of ordinary shares
3,250 4,500 / 0.7 / 2
(xiv) / Dividend cover / Profit available for ordinary shareholders  Ordinary dividend
3,250  1,200 / 2.7 / 2
(xv) / P/E ratio / Market value  EPS
5.81 0.7 / 8.3 / 2

(b)

(i)Days’ sales in accounts receivable

-A rough measure of the days of credit that a firm's offers to its suppliers/clients. (1)

-A long collection period indicates a poorly managed credit control function. (1)

(ii)Debt to equity ratio

-A measure of a company’s financial leverage. (1)

-Companies with higher ratio are thought to be more risky. (1)

(iii)Interest cover

-The ratio is used to determine how easily a company can pay interest expenses on outstanding debt. (1)

-The lower to ratio, the more the company is burdened by debt expense. (1)

(iv)Dividend cover

-Dividend cover is a measure of the ability of a company to maintain the level of dividend paid out. (1)

-The higher the cover, the better the ability to maintain dividend if profits drop.(1)

(v)Price-earnings ratio

-The P/E gives you an idea of what the market is willing to pay for the company’s earnings. (1)

-The higher the P/E the more the market is willing to pay for the company’s earnings. (1)

END OF PAPER

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