HKCEE (2006, 1) (Principle)

HKCEE (2006, 1) (Principle)

(A) Explain the following accounting concepts and illustrate each with an example:

(a) Realisation

(b) Going concern

(B) For each of the independent situations describes below, list the accounting principle or concept that has been violated and provide an explanation:

(a) Yoyo Limited runs a popular news and search site on the Internet. In view of the high hit rate, the directors estimate that advertising income will increase substantially and so decide to record an intangible asset of $1,000,000 in the accounts.

(b) On 1 January 2005, Beatrice Limited purchased for resale 400 pairs of leather shoes at a cost of $300 per pair. The shoes were sold for $500 per pair and 380 pairs were sold during the year. The company recorded the cost of goods sold at $120,000 for the year 2005.

HKCEE (2006, 2) (Depreciation)

(A) State the major characteristics of fixed assets.

(B) Valor Company acquired a machine on 1 January 2002. The machine has an estimated useful life of 5 years. The depreciation charge for the first three years was calculated for this machine using two different depreciation methods as follows:

Year / Straight-line method (5 years) / Reducing-balance method (50% per annum)
2002 / $12,400 / $32,000
2003 / 12,400 / 16,000
2004 / 12,400 / 8,000

You are required to:

(a) State three causes of depreciation.

(b) Calculate the cost of the machine and its estimated residual value.

(c) Prepare journal entries to record the disposal of the machine based on the straight-line method, assuming that the machine was sold on 30 September 2005 for $36,000 on credit. (Narrations are not required)

HKCEE (2006, 3) (Basic)

(A) Given below is a list of accounting terminology:

(1) Accounting equation

(2) Adjusting entries

(3) Closing entries

(4) Correct entries

(5) Discount received

(6) Double entry accounting

(7) Factory overheads

(8) General journal

(9) Liabilities

(10) Postings

(11) Raw materials

(12) Sales journal

(13) Trade discount

(14) Trade balance

Select from (1) to (14) above an appropriate accounting term that best fits each of the definitions/descriptions below:

Definitions/descriptions / Accounting terminology
Example: / Obligations of a firm to transfer assets to other firms as a result of past transactions. / 9
(a) / A book of original entry in which credit sales of fixed assets are recorded. / ?
(b) / A deduction from list price upon the purchase of goods / ?
(c) / A major component of ‘prime cost’. / ?
(d) / A list of all ledger balances as at a particular date for checking the arithmetic accuracy of accounting entries. / ?
(e) / Business transactions recorded with equal amount of debits and credits. / ?
(f) / Entries made at the end of an accounting period to update expenses, revenue, assets or liability accounts on an accrual accounting basis. / ?
(g) / Entries made to transfer the balances of nominal accounts to the profit and loss account. / ?
(h) / The process of transferring accounting data from the books of original entry to ledger accounts. / ?

(B) On 1 January 2006, ABC Ltd found that its closing stock had been overstated by $80,000 at 31 December 2004 and $70,000 at 31 December 2005.

You are required to:

Indicate how the above errors would have affected the following:

(a) the net profit for the year 2004,

(b) the net profit for the year 2005, and

HKCEE (2006, 4) (Financial Analysis)

Ball Limited had an issued share capital consisting of 650,000 ordinary shares of $1 each as at January 2005. On 1 July 2005, the company made an additional issue of 250,000 ordinary shares at $1.50 per share, payable in full on application. Applications were received for 260,000 shares on 8 July 2005. The shares were allotted to the successful applicants on 15 July 2005. Cash was returned to the unsuccessful applications on the same day.

You are required to:

(a) Prepare journal entries for Ball Limited to record the share issue in July 2005. (Narrations are not required)

The company’s information below relates to the year ended 31 December 2005:

$
As at 1 January 2005:
Stock / 62,430
Debtors / 60,080
Share premium / 75,000
Retained profits / 213,000
During year 2005:
Sales / 800,000
Purchases / 500,000
Operating expenses / 320,000
As at 31 December 2005:
Stock / 156,230
Debtors / 102,400
Cash in bank / 168,370
Creditors / 184,200
Accruals / 4,000

You are required to:

(b) Calculate (to one decimal place) the following for year 2005:

(i) Quick ratio

(ii) Credit period allowed to debtors (in days)

(iii) Stock turnover rate

HKCEE (2006, 5) (Bank Rec)

The trial balance of Ho Limited as at 31 March 2006 failed to agree and the difference was entered in a suspense account. The draft net profit for the year amounted to $80,260.

Additional information:

(i) The last month’s bank statement balance at 28 February 2006 showed a credit balance of $19,900, which was the same as that in the cash book on that date. The balance had been wrongly included as the bank balance in the trial balance as at 31 March 2006.

Deposits and cheque payments, totaling $315,000 and $300,700 respectively, had been recorded in the cash book during March 2006.

(ii) The following items were shown on the March bank statement but not in the cash book:

1 Bank charges of $80;

2 Bank deposit interest of $650;

3 A dishonoured cheque of $10,250 from Star Ray Limited; and

4 A direct deposit of $2,400 logged by Kettler Limited.

(iii) Cheques, issued in March, amounting to $16,500 had not been presented to the bank for payment.

(iv) Lodgements, totaling $6,630 for March, were not recorded by the bank until 2 April 2006.

You are required to:

(a) Show the necessary adjustments to be made in the cash book on 31 March 2006.

(b) Prepare a bank reconciliation statement as at 31 March 2006, commencing with the adjusted cash book balance in (a) above.

Subsequent checking of the records revealed the following:

(v) The salaries account had been undercast by $500.

(vi) A credit purchase of $2,000 had been completely omitted.

(vii) Returns from Jane Limited, amounting to $780, had been recorded in the accounts as $870.

(viii) An electricity bill of $1,240 for March 2006 had been paid twice. Both payments had been posted to the ledger. The excess amount paid was to be used to settle future bills.

(ix) A trade discount of 10% was granted to a customer, Mr Wu, on a bulk purchase of $10,000. The sale had been properly recorded in the books. A cash discount of 5% was also allowed to him on his settlement of account in March. However, only the amount received was debited in the cash book and no other entries were made.

(x) $200,000 6% debentures were issued at par on 1 March 2006 to settle a bank loan. Interest on debenture was to be paid every 6 months. No entries relating to these had been made.

You are required to:

(d) Prepare a statement to correct the draft net profit for the year ended 31 March 2006.

HKCEE (2006, 6) (Accounting for partnership)

Ann, Ben and Joe were partners sharing profits and losses in the ratio of 2 : 2 : 3. The balance sheet as at 30 April 2006 was as follows:

The liquidity of the partnership worsened during the past two years and so the partners decided to dissolve the partnership on 1 May 2006. The following information was provided:

(i) The office equipment was sold at a price of 30% below

(ii) Ann took over the motor vehicle to set off her loan to the partnership.

(iii) Most of the furniture was sold at an agreed value of $35,000. The remaining furniture was donated to a charitable orgainisation and Ben paid $200 on behalf of the partnership for transporting the furniture.

(iv) Part of the stock was sold at 90% of its net realizable value of $100,000. The remaining stock was taken over by Ben at an agreed value of $9,750.

(v) A debt of $2,000 was to be written off and a cash discount of 2% was allowed on the remaining debtors.

(vi) The creditors were settled and a discount of 5% was received on 50% of the creditors.

(vii) Realisation expenses amounted to $2,100.

(viii) Joe was unable to meet his liability to the partnership. His deficiency was to be borne by Ann and Ben in their profit and loss sharing ratio.

You are required to prepare:

(a) the realization account;

(b) the bank account; and

HKCEE (2006, 7) (Incomplete records)

The following is a summary of the receipts and payments of Summit Badminton Club for the year ended 31 March 2006:

$ / $
Balance at bank – 1 April 2005 / 65,720 / Bar creditors / 52,700
Subscriptions / 254,200 / Badminton course – coach salaries / 95,000
Bar debtors / 141,700 / Bar operating expenses / 19,450
Bar cash sales / 16,000 / Electricity / 21,500
Badminton course fees / 125,000 / Rent and rates / 174,000
Sales of rackets / 48,900 / Purchase of rackets / 30,600
Sale of office equipment / 6,500 / Salaries / 143,000
Purchases of office equipment / 100,000
Balance at bank – 31 March 2006 / 21,770
658,020 / 658,020

Additional information:

(i) Some of the club’s balances as at 31 March are as follows:

2005 / 2006
$ / $
Bar stock / 18,580 / ?
Subscriptions in arrears / 9,300 / 10,800
Subscriptions in advance / 11,000 / 7,800
Office equipment at cost / 260,000 / ?
Provision for depreciation – office equipment / 135,000 / ?
Bar debtors / 13,200 / ?
Bar creditors / 4,300 / ?
Rent and rates prepaid / 2,500 / 6,500
Electricity owing / 5,000 / 3,000

(ii) Bar sales were made at a gross profit ratio of 55%. 10% of the bar sales were for cash.

(iii) All bar purchases were on credit and the bar stock turnover rate was 5 times.

(iv) Office equipment which had been sold on 1 April 2005 had a cost of $90,000 and a net book value of $8,000. Additional office equipment was purchased on 1 January 2006.

It is the club’s policy to depreciate office equipment at 25% per annum using the reducing balance method.

(v) 10% of the rent and rates was to be allocated to bar.

(vi) The club started selling rackets as from 1 December 2005. All purchases and sales were for cash. The rackets were sold at a profit of $20,500 during the four months.

You are required to prepare:

(a) a bar trading account for the year ended 31 March 2006;

(b) an income and expenditure account for the year ended 31 March 2006; and