Answers to Mock Exam Paper (Mar 2013)— Paper 2A
SECTION A
1(a)
Allowance for Doubtful Debts2012 / $ / 2012 / $
Dec / 31 / Balance c/f / 24,150 / Dec / 31 / Profit and loss / 24,150 / 0.50.5
[($490,800 $7,800) 5%]
2013 / 2013
Dec / 31 / Profit and loss / 9,190 / Jan / 1 / Balance b/f / 24,150 / 0.50.5
" / 31 / Balance c/f / 14,960 / 0.5
[($389,000 $15,000) 4%]
24,150 / 24,150
Allowance for Discounts Allowed
2012 / $ / 2012 / $
Dec / 31 / Balance c/f / 9,177 / Dec / 31 / Profit and loss / 9,177 / 0.50.5
[($490,800 $7,800
$24,150 ) 2%]
2013 / 2013
Dec / 31 / Balance c/f / 17,952 / Jan / 1 / Balance b/f / 9,177 / 0.50.5
[($389,000 $15,000 / Dec / 31 / Profit and loss / 8,775 / 0.5
$14,960) 5%]
17,952 / 17,952
(5 marks)
(b)
Coles LtdBalance Sheets as at 31 December (extract)
$ / $
2012 / Trade receivables ($490,800 $7,800) / 483,000 / 0.5
Less / Allowance for doubtful debts / (24,150) / 0.5
Allowance for discounts allowed / (9,177) / 449,673 / 0.5
2013 / Trade receivables ($389,000 $15,000) / 374,000 / 0.5
Less / Allowance for doubtful debts / (14,960) / 0.5
Allowance for discounts allowed / (17,952) / 341,088 / 0.5
(3 marks)
2(a) & (b)
Per unit: / Product M / Product N$ / $
Selling price / 350 / 220 / 0.250.25
Variable manufacturing costs / (170) / (98) / 0.250.25
Variable administrative and selling costs / (70) / (40) / 0.250.25
Contribution margin / 110 / 82 / 0.250.25
Product M / ProductN / Total
Sales mix (units) / 40,000 / 100,000 / 140,000
Weighted average unit contribution (W1) / — / — / $90 / 0.5
Break-even sales units (W2) / 31,429 / 78,571 / 110,000 / 0.5 each
Break-even sales revenue (W3) / $11,000,150 / $17,285,620 / 28,285,770 / 0.5 each
Weighted average unit selling price (W4) / — / — / $257.14 / 0.5
Contribution margin ratio (W5) / — / — / 35% / 1
(7 marks)
Workings:
(W1)Weighted average unit contribution= [($110 40,000) + ($82 100,000)] 140,000= $90
(W2)Break-even sales volume = $9,900,000 $90 = 110,000 units
Break-even sales volume of Product M= 110,000 (40,000 140,000)
= 31,429 units (rounded to the nearest unit)
Break-even sales volume of Product N= 110,000 (100,000 140,000)
= 78,571 units (rounded to the nearest unit)
(W3)Break-even sales revenue of Product M = 31,429 $350 = $11,000,150
Break-even sales revenue of Product N = 78,571 $220 = $17,285,620
(W4)Weighted average unit selling price
= [$350 (40,000 140,000)] + [$220 (100,000 140,000)]= $257.14
(W5)Contribution margin ratio = $90 $257.14 = 35%
3(a)
Linfield LtdBank Reconciliation Statement as at 31 March 2013 / 0$ / $
Overdraft balance as per cash book / (39,580) / 0.5
Add / Dividends received (ii) / 12,980 / 0.5
Dishonoured cheque (vi) / 14,785 / 0.5
Stale cheque (vii) / 18,999 / 0.5
Unpresented cheques ($16,988 + $26,835) (vii) / 43,823 / 90,587 / 1
51,007
Less / Cheque payment debited twice to cash book
[($1,700 2) + $1,700](i) / 5,100 / 1
Bank charges (iii) / 1,900 / 0.5
Autopay — Electricity charges (iv) / 7,180 / 0.5
Uncredited cheque (v) / 7,064 / (21,244) / 0.5
Balance as per bank statement / 29,763 / 0.5
(6 marks)
(b)Correct bank balance=$39,580 Cr + $12,980 + $14,785 + $18,999 $5,100
$1,900 $7,180(1 mark)
=$6,996 Cr (overdraft)(1 mark)
4(a)
The JournalDate / Details / Dr / Cr
2013 / $ / $
Feb / 15 / Bank / 2,475,000 / 0.5
Preference share applicants
(500,000 1/2 3/4 $2) / 375,000 / 0.5
Ordinary share applicants
(400,000 3/4 1/2 2 $7) / 2,100,000 / 0.5
" / 28 / Preference share applicants / 375,000 / 0.5
Preference share capital / 375,000 / 0.5
" / 28 / Ordinary share applicants / 1,050,000 / 0.5
Ordinary share capital
(400,000 3/41/2 $5) / 750,000 / 0.5
Share premium [150,000 ($7 $5)] / 300,000 / 0.5
" / 28 / Ordinary share applicants
[(300,000 150,000) $7] / 1,050,000 / 0.5
Bank / 1,050,000 / 0.5
(5 marks)
(b)Differences between preference and ordinary shares include:
Preference shareholdersmust receive a certain amount of dividends before ordinary shareholders can be paid any dividends.
Ordinary shares carry voting rights while preference shares do not.
Preference shareholders have priority over ordinary shareholders in the return of their capital uponthe liquidation of a company.
(Any two of the above, 1 mark for each point)
(Any other reasonable answers)
Section B
5(a)
Profit and Loss Appropriation$ / $ / $
Interest on capital — / Profit and loss (net profit) / 1,549,040 / 5.5
Current: Kevin / (Workings)
($800,000 8%) / 64,000 / Interest on drawings — / 0.5
Current: Lucy / Current: Kevin
($600,000 8%) / 48,000 / ($39,000 10% 6/12) / 1,950 / 0.5 0.5
Current: Donald / Current: Donald
($400,000 8%) / 32,000 / ($28,000 10% 6/12) / 1,400 / 0.50.5
Salaries to partners —
Current: Kevin / 120,000 / 0.5
Current: Donald / 84,000 / 0.5
Share of profit —
Current: Kevin (5/10) / 602,195 / 1
Current: Lucy (2/10) / 240,878 / 1
Current: Donald (3/10) / 361,317 / 1,204,390 / 1
1,552,390 / 1,552,390
(12 marks)
Workings:Adjustments to net profit:
$ / $Net profit as per draft accounts / 1,720,000 / 0.5
Add / Decrease in allowance for doubtful accounts
{$67,392 [($1,290,500 $5,700) 4%]} / 16,000 / 1
1,736,000
Less / Bad debt written off / 5,700 / 0.5
Depreciation: / Furniture and equipment
[($600,800 $305,000) 20%] / 59,160 / 1
Machinery [($750,000 $50,000)
(150,000 1,000,000)] / 105,000 / 1
Interest on loan from Lucy($190,000 12% 9/12) / 17,100 / (186,960) / 1
Corrected net profit / 1,549,040 / 0.5
(b)Treatment under the Partnership Ordinance:
(i)No interest is to be allowed on capital contributed by partners.(1 mark)
(ii)Partners are not entitled to salaries.(1 mark)
(iii)Profits and losses are to be shared equally by partners.(1 mark)
6(a)
Sales Ledger Control$ / $
Balance b/f / 429,550 / Discounts allowed omitted (i) / 2,970 / 0.50.5
Dishonoured cheque omitted (iv) / 2,753 / Set-off — Purchases ledger (vi) / 5,390 / 0.50.5
Sales day book undercast (ix) / 900 / Sales return omitted (viii) / 5,265 / 0.50.5
Balance c/f / 419,578 / 0.5
433,203 / 433,203
Purchases Ledger Control
$ / $
Purchases overstated (iii) / 900 / Balance b/f / 265,770 / 10.5
($9,890 $8,990) / Purchases returns day book / 790 / 0.5
Set-off — Sales ledger (vi) / 5,390 / overcast (x) / 0.5
Balance c/f / 260,270 / 0.5
266,560 / 266,560
(6.5 marks)
(b)
Reconciliation of the Total of Sales Ledger Balances with theCorrected Sales Ledger Control Account Balance as at 30 September 2012$ / $
Total of sales ledger balances before adjustments / 423,380 / 0.5
Add / Dishonoured cheque omitted (iv) / 2,753 / 0.5
426,133
Less / Trade debtor’s payment incorrectly credited to
purchases ledger (vii) / 1,290 / 1
Sales return omitted ($3,900 150% 90%) (viii) / 5,265 / (6,555) / 1
Corrected balance as per sales ledger control account / 419,578 / 0.5
Reconciliation of the Total of Purchases Ledger Balances with theCorrected Purchases Ledger Control Account Balance as at 30 September 2012
$ / $
Total of purchases ledger balances before adjustments / 271,765 / 0.5
Add / Trade creditor’s balance omitted (ii) / 585 / 0.5
272,350
Less / Purchases overstated and posted twice
[($9,890 2) $8,990] (iii) / 10,790 / 1
Trade debtor’s payment incorrectly credited to
purchases ledger (vii) / 1,290 / (12,080) / 0.5
Corrected balance as per purchases ledger control account / 260,270 / 0.5
(6.5 marks)
(c)Advantages of maintaining control accounts for the sales and purchases ledgers include:
They help test the arithmetical accuracy of entries in the ledgers.
They help safeguard against fraud ifcontrol accounts are prepared by people who are different from those who make entries in the books of original entry and ledgers.
Self-balancing control accounts facilitate the preparation of financial statements.
(Any two of the above, 1 mark for each point)
(Any other reasonable answers)
7(a)(i)
Machinery2013 / $ / 2013 / $
Jan / 1 / Balance b/f / 470,000 / Apr / 1 / Disposals — No. 4 / 30,000 / 0.50.5
Dec / 1 / Disposals — / Jul / 1 / Disposals — No. 7 / 18,000 / 0.5
Trade-invalue (No. 5) / 45,000 / Dec / 1 / Disposals — No. 5 / 72,000 / 0.50.5
" / 1 / Fortune Machinery Ltd / 45,000 / " / 31 / Balance c/f / 440,000 / 0.50.5
($90,000 $45,000)
560,000 / 560,000
(3.5 marks)
(ii)
Accumulated Depreciation on Machinery2013 / $ / 2013 / $
Apr / 1 / Disposals — No. 4 (W1) / 20,625 / Jan / 1 / Balance b/f / 289,600 / 2 0.5
Jul / 1 / Disposals — No. 7 (W2) / 5,250 / Dec / 31 / Depreciation (W4) / 110,000 / 1 2
Dec / 1 / Disposals — No. 5 (W3) / 40,500 / 1.5
" / 31 / Balance c/f / 333,225 / 0.5
399,600 / 399,600
(7.5 marks)
(iii)
Machinery Disposals2013 / $ / 2013 / $
Apr / 1 / Disposals — No. 4 / 30,000 / Apr / 1 / Acc. dep. — No. 4 / 20,625 / 0.50.5
Jul / 1 / Disposals — No. 7 / 18,000 / Jun / 30 / Bank / 12,500 / 0.50.5
Dec / 1 / Disposals — No. 5 / 72,000 / Jul / 1 / Acc.Dep. — No. 7 / 5,250 / 0.50.5
" / 31 / Profit and loss — / " / 1 / Bank / 11,300 / 0.5
Profit on disposal / 15,175 / Dec / 1 / Acc. Dep. — No. 5 / 40,500 / 0.50.5
" / 1 / Machinery —
Trade-in value (No. 5) / 45,000 / 0.5
135,175 / 135,175
(5 marks)
Workings:
Depreciation / Year ended31 December 2010 / Year ended
31 December 2011 / Year ended
31 December 2012
Machine No. 4 (W1) / $30,000 25% 6/12
= $3,7500.5 / $30,000 25%
= $7,5000.5 / $30,000 25%
= $7,5000.5
Machine No. 7 (W2) / — / — / $18,000 25% 8/12
= $3,0000.5
Machine No. 5 (W3) / — / $72,000 25% 4/12
= $6,0000.5 / $72,000 25%
= $18,0000.5
Depreciation / Year ended 31 December 2013 / Total
Machine No. 4 (W1) / $30,000 25% 3/12 = $1,8750.5 / $20,625
Machine No. 7 (W2) / $18,000 25% 6/12 = $2,2500.5 / $5,250
Machine No. 5 (W3) / $72,000 25% 11/12 = $16,5000.5 / $40,500
Other machines / No. 9 ($90,000 25% 1/12) + [($470,000 $30,000 $18,000 $72,000) 25%]= $89,3750.5 / $89,375
All machines (W4) / $1,875 + $2,250 + $16,500 + $89,375= $110,0002 / $110,000
(b)Depreciation is the systematic allocation of the depreciable amount of a tangible non-current asset over its estimated useful life. (1 mark)
Causes of depreciation include wear and tear, obsolescence, rust, rot and decay, inadequacy and depletion.
(Any three of the above, 1 mark for each point)
(Any other reasonable answers)
Section C
8(a)(i)
Billion LtdIncome Statement for the year ended 31 May 2013 / 0
$ / $ / $
Sales / 60,737,230 / 0.25
Less / Returns inwards / (914,300) / 59,822,930 / 0.25
Less / Cost of goods sold:
Opening inventory / 2,703,700 / 0.25
Add / Purchases / 25,140,780 / 0.25
Carriage inwards / 1,063,830 / 0.25
28,908,310
Less / Returns outwards / (466,150) / 0.25
28,442,160
Less / Closing inventory
{$3,509,000 [$240,000 ($95,000 $29,000)]} / (3,335,000) / (25,107,160) / 0.75
Gross profit / 34,715,770
Less / Expenses:
Rent and rates ($2,758,850 $135,050) / 2,623,800 / 0.5
Salaries and wages ($7,735,080 + $289,000) / 8,024,080 / 0.5
Marketing expenses / 492,500 / 0.25
Bad debts / 745,000 / 0.25
Increase in allowance for doubtful debts
{$578,940 + [($14,678,940 $578,940) 5%] $865,700} / 418,240 / 1
Depreciation: / Buildings ($46,250,000 5%) / 2,312,500 / 0.5
Machinery and equipment
[($40,635,000 $3,974,500) 10%] / 3,666,050 / (18,282,170) / 0.5
Net profit / 16,433,600
Less / Profits tax ($16,433,600 20%) / (3,286,720) / 0.5
Profit after tax / 13,146,880
Add / Retained losses brought forward / (3,421,380) / 0.25
9,725,500
Less / Appropriations:
Transfer to general reserve / 2,000,000 / 0.25
Dividends: / Preference shares
($18,000,000 6%) / 1,080,000 / 0.5
Ordinary shares
[($37,500,000 $5) $0.2] / 1,500,000 / 2,580,000 / (4,580,000) / 0.5
Retained profits carried forward / 5,145,500 / 0.25
(8 marks)
(ii)
Billion LtdBalance Sheet as at 31 May 2013 / 0
$ / $ / $
Accumulated / Net book
Non-current assets / Cost / depreciation / value
Buildings / 46,250,000 / 7,931,250 / * / 38,318,750 / 0.5
Machinery and equipment / 40,635,000 / 7,640,550 / ** / 32,994,450 / 0.5
86,885,000 / 15,771,800 / 71,313,200
Current assets
Inventory / 3,335,000 / 0.25
Accounts receivable / 14,678,940 / 0.25
Less / Allowance for doubtful debts
{$578,940 + [($14,678,940 $578,940) 5%]} / (1,283,940) / 13,395,000 / 0.5
Prepayments / 135,050 / 0.25
Bank / 5,875,420 / 0.25
22,740,470
Less / Current liabilities
Accounts payable / 6,627,450 / 0.25
Accruals / 289,000 / 0.25
Tax payable / 3,286,720 / (10,203,170) / 0.25
Net current assets / 12,537,300
83,850,500
Financed by:
Capital and reserves
Preference share capital / 18,000,000 / 0.25
Ordinary share capital / 37,500,000 / 0.25
Share premium / 18,625,000 / 0.25
General reserve / 2,000,000 / 0.25
Retained profits / 5,145,500 / 0.25
Proposed dividends ($1,080,000 + $1,500,000) / 2,580,000 / 0.5
83,850,500
(5 marks)
*$5,618,750 + ($46,250,000 5%) = $7,931,250
**$3,974,500 + [($40,635,000 $3,974,500) 10%] = $7,640,550
(b) (i)Asset turnover= Net sales ÷ Total assets
= $59,822,930 ($71,313,200 + $22,740,470)
= 0.64 times(1 mark)
(ii)Return on equity= Profit after tax ÷ (Share capital + Reserves)
= $13,146,880 $83,850,500
= 15.68%(1 mark)
(c)No, it wouldbe unethical for the company not to do so. Financial statements should provide accounting information that is true and accurate. As the company is likely to lose the lawsuit, it should make a provision for damages in the accounts and disclose the lawsuit in detail in the financial statements. The directors should not allow their personal interests to override public interest. (2 marks)
(d)The prudence concept wouldbe violated. This concept requires that a provision be made for possible losses, whether the amount is certain or just an estimate. As the company would probably lose the lawsuit, a provision for damages should be made in the accounts. (1 mark)
The materiality principle wouldalso be violated. The amount claimed of $5,000,000 is material as it represents more than 30% ofprofit before tax for the year. A provision for damages should be made in the books and details of the lawsuit should be disclosed in the financial statements. (1 mark)
(e)The principle of integrity wouldbe violated. Under this principle, professional accountants should not be involved in reports if they believe that such reports omit or hide information. The non-disclosure of the lawsuitwould result in the omission of important information in the financial statements and this wouldviolate the principle of integrity. (1 mark)
9(a)The absorption base for the manufacturing overheads of the machining department is machine hours as this production department relies more heavily on machines.
(1 mark)
The absorption base for the manufacturing overheads of the assembly department is direct labourhours as this production department relies more heavily on labour.
(1 mark)
(b)Predetermined overhead absorption rates:
Machining department= $3,480,000 ÷ 145,000
= $24 per machine hour(1 mark)
Assembly department= $2,700,000 ÷ 125,000
= $21.6 per direct labour hour(1 mark)
(c)Total manufacturing costs of Job No. A150
= $57,110 + $88,040 + $70,200 + $285,000 + (1,500 $24) + (2,000 $21.6)
(2 marks)
= $579,550 (1 mark)
(d)Selling price of Job No. A150:
Job No. A150$
Total manufacturing costs / 579,550 / 0.5
Add / Administrative overheads ($579,550 30%) / 173,865 / 1
Total costs / 753,415
Add / Mark-up ($753,415 40%) / 301,366 / 1
Selling price / 1,054,781 / 0.5
(3 marks)
(e)Machining department:
Manufacturing overheads absorbed = 147,900 $24 = $3,549,600(1 mark)
Actual manufacturing overheads = $3,180,050
Over-absorbed manufacturing overheads = $3,549,600 $3,180,050 = $369,550 (1 mark)
Assembly department:
Manufacturing overheads absorbed = 118,700 $21.6 = $2,563,920(1 mark)
Actual manufacturing overheads = $2,970,800
Under-absorbed manufacturing overheads = $2,563,920 $2,970,800 = $406,880 (1 mark)
(f)Causes of under- or over-absorption of manufacturing overheads:
Budgeted manufacturing overheads for the period being smaller (or greater) than actual overheads incurred during that period. (1 mark)
Actual quantity of the absorption base being smaller (or greater) than the budgeted quantity. (1 mark)
(g)Advantages of using a computerised accounting system include:
Data can be processed automatically by computer at a high speed.
Information can be processed in a consistent and accurate manner, provided that all data are correctly entered.
Faster processing and higher accuracy of accounting information will lead to improved efficiency and lower costs in the management of a business.
(Any two of the above, 1 mark for each point)
(Any other reasonable answers)
Disadvantages of using a computerised accounting system include:
Problems like power failures, computer viruses and hacking can cause serious damage to a computer system and lead to information loss.
Data in a computer system can be retrieved, copied and disseminated very easily if unrestricted.
Installing and operating a computerised accounting system is costly as it involves expenditures for computer hardware and software, staff training and facility maintenance.
(Any two of the above, 1 mark for each point)
(Any other reasonable answers)
END OF PAPER 2A
Mock Exam Paper (Mar 2013):Paper 2A (Answers)
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