HKCEE (2009, 1) (Depreciation)

The financial year for Victor Company ends on 31 December each year. The following fixed assets schedule was prepared on 31 December 2008:

Fixed Asset / Acquisition Date / Cost / Estimated Salvage Value / Depreciation Method / Estimated Useful Life/ Annual Depreciation Rate / Depreciation Expenses
2007 / 2008
$ / $ / $ / $
Furniture A / 1 Jan 2006 / 100,000 / (1) / Straight-line / 4 years / 22,000 / (2)
Office equipment X / 1 Mar 2007 / 200,000 / 33,614 / Reducing- balance / 30% / (3) / (4)
Furniture B / 15 July 2007 / (5) / 5,000 / Straight-line / 5 years / (6) / 8,000
Office equipment Y / 20 Sept 2008 / 280,000 / - / Reducing- balance / (7) / - / 56,000
Furniture C / 1 Oct 2008 / 76,000 / 4,000 / Straight-line / 10 years / - / (8)

Additional information:

(i) It is the company’s policy to charge a full year’s depreciation on fixed assets purchased in the first half of the financial year. For fixed asset purchased in the second half of the financial year, a half year’s depreciation is charged.

(ii) On 1 November 2008, the company spent $5,000 to extend the useful life of Furniture C and $600 for the maintenance of this asset for the two years ended 31 December 2009. These amounts had been included in the cost of Furniture C at 31 December 2008.

REQUIRED:

Compute the correct amount/depreciation rate for items (1) to (8) in the schedule above.

(1) / $12,000 / $100,000 - $22,000 x 4 = $12,000
(2) / $22,000
(3) / $60,000 / $200,000 x 30% = $60,000
(4) / $42,000 / ($200,000 - $60,000) x 30% = $42,000
(5) / $45,000 / $8,000 x 5 + $5,000 = $45,000
(6) / $4,000 / $8,000 x 1/2 = $4,000
(7) / 40% / ($56,000 x 2) ÷ $280,000 = 40%
(8) / $3,570 / ($76,000 - $4,000 - $600) ÷ 10 x 1/2 = $3,570

HKCEE (2009, 2) (Correction Errors)

(A) Kate Chan owns a small store that sells candies in creative gift package. Customers place orders online and immediate payments are to be made using credit cards. Goods are to be delivered on the following day.

REQUIRED:

State when the sales revenue should be recognized by Kate Chan and briefly explain the accounting principle or concept that should be adopted.

(B) The trial balance of Tony Limited as at 31 December 2008 failed to agree and the difference was debited to a suspense account. The draft net profit for the year amounted to $164,555.

Subsequent checking of the records revealed the following:

(i) An accrual for salaries of $1,000 was mistakenly recorded as a prepayment.

(ii) Prepaid rates of $860 at 31 December 2007 had been brought forward as an opening credit balance in the rates account.

(iii) An item of office equipment which was fully depreciated at 31 December 2007 was sold on 1 January 2008 as scrap for $130 on credit. The cost of the office equipment was $8,000. No entries in respect of the disposal had been made. The company had provided depreciation for 2008 at the rate of 10% on the cost of this office equipment.

REQUIRED:

(a) Prepare the necessary journal entries to correct the above. (Note: Narrations are not required.)

(b) Prepare a statement to correct the draft net profit for the year ended 31 December 2008.

(A) / - Sales revenue should be recorded after the gift packages are delivered to the customers.
- Realisation principle should be adopted.
- Revenue for a period is determined by applying the realization principle, which requires that the revenue be
recognized and recorded when goods are sold or when services are rendered.

(B)

(a)

Journal
Debit / Credit
$ / $
(i) / Salaries (profit and loss) / 2,000
Prepayments / 1,000
Accruals / 1,000
(ii) / Rates (profit and loss) ($860 x 2) / 1,720
Suspense / 1,720
(iii) / Accumulated depreciation – office equipment / 8,000
Debtors / 130
Office equipment / 8,000
Gain on disposal of assets (profit and loss) / 130
Accumulated depreciation – office equipment ($8,000 x 10%) / 800
Depreciation (profit and loss) / 800

(b)

Statement of adjusted net profit for the year ended 31 December 2008
$ / $
Net profit per draft accounts / 164,555
Add Gain on disposal of assets / 130
Depreciation on fully depreciated asset / 800 / 930
165,485
Less Accrued salaries recorded as prepayment / 2,000
Opening balance of prepaid rates recorded as credit balance / 1,720 / 3,720
Corrected net profit / 161,765

HKCEE (2009, 3) (Accounting Principles)

(A) Elton Lee’s business had been running at a loss during the past three years. Since costs of operation had been rising, Elton decided to close his business on 1 January 2009. In the balance sheet at 31 December 2008, Elton listed the assets at their book values.

REQUIRED:

State the accounting principle or concept that has been violated and give an explanation.

(B) Vera Company keeps its petty cash on the imprest system and maintains a petty cash float of $3,000 on the first day of each month.

On 30 November 2008, the balance of petty cash was $1,037. The following transactions took place during the month of December 2008:

December / 1 / Drew cash from the bank to restore to the imprest amount.
2 / Paid newspaper subscriptions for December $135.
3 / Bought postage stamps $400 and note pads $42.
8 / Added $300 to messenger’s Octopus card for delivery of documents.
11 / Reimbursed taxi fares $97.
15 / Paid registered letter charges $122.
16 / Refunded $294 to Carl Cheung, a customer, for an overpayment of his account in November 2008.
19 / Bought ball pens and staplers $205.
22 / Purchased paper cups and tissue rolls $76.
27 / Bought magazines $163.
29 / Paid speed post charges $210 and bus fare $8.

REQUIRED:

Draw up the petty cash book to record the above transactions for December 2008.

(A) / Going concern principle
—  A business is assumed to continue to operate in the foreseeable future. In particular, the financial
statements have been drawn up on the assumption that there is no intention or necessity to
liquidate or curtail significantly the scale of operations.
—  Since the business is going to wind up on 1 January 2009, the assets should be shown at their
realizable values in the balance sheet as at 31 December 2008.

(B)

Petty Cash Book
Receipt / Date / Particulars / Total / Postage / Stationery / Travelling Expenses / Sundry Expenses / Ledger Accounts
$ / 2008 / $ / $ / $ / $ / $ / $
1,037 / Dec / 1 / Balance b/d
1,963 / " / 1 / Bank
2 / Newspapers / 135 / 135
" / 3 / Postage stamps and note pads / 442 / 400 / 42
" / 8 / Octopus card / 300 / 300
" / 11 / Taxi fares / 97 / 97
" / 15 / Registered letters / 122 / 122
" / 16 / Carl Cheung / 294 / 294
" / 19 / Ball pens and staplers / 205 / 205
" / 22 / Paper cups and tissue rolls / 76 / 76
" / 27 / Magazines / 163 / 163
" / 29 / Speed post charges and bus fare / 218 / 210 / 8
2,052 / 732 / 247 / 405 / 374 / 294
31 / Balance c/d / 948
3,000 / 3,000

HKCEE (2009, 4) (Accounting for partnership)

Ivan and Joe were in partnership sharing profits and losses in the ratio of 2 : 3 respectively. The balance sheet as at 31 December 2008 was as follows:

Owing to shortage of cash, Ivan and Joe agreed to admit Kerry as a partner on the following terms:

(i) Ivan, Joe and Kerry were to share profits and losses in the ratio 3 : 2 : 1 respectively.

(ii) The motor vehicles were to be revalued to 80% of the book value and the equipment was to be revalued upwards by $20,000.

(iii) Stock was to be revalued to $35,000

(iv) Only 98% of the debtors were expected to be collectible.

(v) Kerry was to introduce $200,000 as capital and his share of goodwill was to be $50,000.

(vi) No goodwill account was to be opened in the books of the partnership.

REQUIRED:

(a) Prepare the revaluation account of the partnership.

(b) For each of the following independent situations, prepare the journal entries related to the partners’ capital accounts to record the admission of Kerry:

(1) Kerry paid cash into the partnership for his capital contribution, plus the amount for his share of goodwill.

(2) Kerry paid cash into the partnership for his capital contribution.

(3) Kerry brought in motor vehicles of $120,000 and stock of $80,000 to the partnership as his capital contribution and paid Ivan and Joe privately for his share of goodwill.

(Note: Narrations are not required.)

(a)

Revaluation

$ / $
Motor vehicles ($430,000 x 20%) / 86,000 / Equipment / 20,000
Stock ($40,000 – $35,000) / 5,000 / Revaluation loss
Provision for bad debts ($38,500 x 2%) / 770 / Ivan (2/5) / 28,708
Joe (3/5) / 43,062 / 71,770
91,770 / 91,770

(b)

Journal
Details / Dr / Cr
$ / $
(1) / Cash ($200,000 + $50,000) / 250,000
Capital – Ivan / 30,000
Capital – Joe / 80,000
Capital – Kerry / 200,000
(2) / Cash / 200,000
Capital – Ivan / 30,000
Capital – Joe / 80,000
Capital – Kerry / 150,000
(3) / Motor vehicles / 120,000
Stock / 80,000
Capital – Kerry / 200,000
Journal
Details / Dr / Cr
$ / $
(1) / Cash ($200,000 + $50,000) / 250,000
Capital – Ivan / 30,000
Capital – Joe / 80,000
Capital – Kerry / 200,000
(1) / Cash / 200,000
Capital – Kerry / 200,000
Cash / 50,000
Capital – Kerry / 50,000
Capital – Ivan / 30,000
Capital –Kerry / 50,000
Capital – Joe / 80,000
(2) / Cash / 200,000
Capital – Ivan / 30,000
Capital – Joe / 80,000
Capital – Kerry / 150,000
(2) / Cash / 200,000
Capital – Kerry / 200,000
Capital – Ivan / 30,000
Capital –Kerry / 50,000
Capital – Joe / 80,000
(3) / Motor vehicles / 120,000
Stock / 80,000
Capital – Kerry / 200,000

HKCEE (2009, 5) (Cost Accounting and Accounting for partnership)

The following trial balance was extracted from the books of Lee Leung Manufacturing Company Limited as at 31 December 2008:

$ / $
Sales / 2,886,000
Stock, 1 January 2008
Raw materials / 121,520
Work-in-progress / 50,850
Finished goods / 163,750
Trade debtors and trade creditors / 238,000 / 108,900
Ordinary shares of $2 each, fully paid / 380,000
Share premium / 40,000
Machinery, at cost / 1,025,000
Office furniture and fittings, at cost / 150,000
Accumulated depreciation, 1 January 2008
Machinery / 398,000
Office furniture and fittings / 63,700
Wages and salaries / 586,340
Rent and rates (factory 2/3; office 1/3) / 297,600
Purchase of raw materials / 1,236,000
Administrative expenses / 210,520
Selling and distribution expenses / 109,020
Carriage inwards / 22,430
Provision for doubtful debts, 1 January 2008 / 7,100
8% loan (borrowed in 2007) / 240,000
Loan interest / 10,000
Cash at bank / 442,210
General reserve / 86,000
Retained profits, 1 January 2008 / 48,140
Ordinary dividend / 21,000
Share and debenture issue / 426,400
4,684,240 / 4,684,240

Additional information:

(i) Stock as at 31 December 2008:

$
Raw materials / 140,000
Work-in-progress / 47,100
Finished goods / 148,510

(ii) Depreciation is to be charged as follows:

Machinery – 20% on net book value

Office furniture and fittings – 20% on cost

(iii) Analysis of the wages and salaries revealed:

$
Direct labour / 198,590
Indirect labour / 78,000
Salaries to factory supervisors / 120,000
Salaries to office staff / 189,750
586,340

(iv) The following adjustments were to be made on 31 December 2008:

$
Accrued administrative expenses / 5,000
Prepaid selling and distribution expenses / 3,000

(v) Provision for doubtful debts was to be increased to $11,900.

(vi) $120,000 of the 8% loan had been repaid on 31 August 2008 and another $120,000 is to be repaid on 31 August 2009. The remaining amount is repayable on 31 August 2010.

(vii) The board of directors proposed to declare a final dividend of $0.15 per share and to transfer $100,000 to general reserve.

(viii) On 1 April 2008, $180,000 6% debentures were issued at 98. The company credited the share and debenture issue account with the proceeds. Discount on debentures was to be written off in full against share premium account.

On 7 October 2008, 100,000 ordinary shares were offered to the public at $2.50 per share. The proceeds received had been recorded in the share and debenture issue account. The new shares were also entitled to the final dividend proposed for the year.

REQUIRED:

(a) Prepare the manufacturing account for the year ended 31 December 2008, showing clearly the cost of raw materials consumed, the prime cost and the production cost of finished goods.

(b) Prepare the trading, profit and loss and appropriation account for the year ended 31 December 2008.

(c) Prepare the balance sheet as at 31 December 2008.

(a)

Lee Leung Manufacturing Company Limited
Manufacturing account for the year ended 31 December 2008
$ / $
Opening stock / 121,520
Add: Purchases / 1,236,000
Carriage inwards / 22,430 / 1,258,430
1,379,950
Less Closing stock / 140,000
Cost of raw materials consumed / 1,239,950
Direct labour / 198,590
Prime cost / 1,438,540
Factory overheads
Indirect labour / 78,000
Salaries to factory supervisors / 120,000
Rent and rates ($297,600 x 2/3) / 198,400
Depreciation – machinery [($1,025,000 - $398,000) x 20%] / 125,400 / 521,800
1,960,340
Add Opening work-in-progress / 50,850
2,011,190
Less Closing work-in-progress / 47,100
Production cost of finished goods / 1,964,090

(b)

Lee Leung Manufacturing Company Limited
Trading and profit and loss and appropriation account for the year ended 31 December 2008
$ / $
Sales / 2,886,000
Less: Cost of goods sold:
Opening stock / 163,750
Add Production cost of finished goods / 1,964,090
2,127,840
Less Closing stock / 148,510 / 1,979,330
Gross profit / 906,670
Less Expenses
Salaries / 189,750
Rent and rates ($297,600 x 1/3) / 99,200
Administrative expenses ($210,520 + $5,000) / 215,520
Selling and distribution expenses ($109,020 – $3,000) / 106,020
Provision for doubtful debts ($11,900 – $7,100) / 4,800
Loan interest ($120,000 x 8% x 8/12 + $240,000 x 8%) / 25,600
Debenture interest ($180,000 x 6% x 9/12) / 8,100
Depreciation – office furniture and fittings ($150,000 x 20%) / 30,000 / 678,990
Net profit / 227,680
Less: Appropriations
Transfer to general reserve / 100,000
Ordinary dividend – paid / 21,000
– proposed [($380,000 / $2 + 100,000) x $0.15] / 43,500 / 164,500
Retained profits for the year / 63,180

(c)