Longman Mock (9, 2011) (Accounting for Limited)

Longman Mock (9, 2011) (Accounting for Limited)

The following trial balance was extracted from the books of Aurora Ltd as at 31 October 2012:

Dr / Cr
$ / $
Purchases / 1,005,631
Sales / 2,168,389
Returns inwards / 36,572
Returns outwards / 18,643
Discounts allowed / 42,553
Bad debts / 29,799
Allowance for doubtful accounts / 34,631
Debenture interest / 60,800
Rent and rates / 210,054
Salaries and wages / 105,687
Repairs and maintenance / 43,216
Sundry expenses / 19,700
Bank / 287,545
Inventory, 1 November 2011 / 108,123
Premises / 3,346,880
Machinery and equipment / 1,625,400
Accumulated depreciation: / Premises / 224,750
Machinery and equipment / 158,980
Retained profits / 296,855
Ordinary shares of $10 each, fully paid / 2,300,000
8% debentures (repayable in 2018) / 1,520,000
General reserve / 268,300
Share premium / 345,000
Interim dividend / 69,000
Accounts payable / 265,098
Accounts receivable / 609,686
7,600,646 / 7,600,646

Additional information:

(i) Inventory as at 31 October 2012 was valued at $139,975. Items costing $12,000 were damaged but were included in the closing inventory at cost. These items could only be sold at a discount of 50%.

(ii) One of the trade debtors had been declared bankrupt and was unable to repay his debt of $7,866. The company also needed to maintain an allowance for doubtful accounts at 5% of accounts receivable.

(iii) Depreciation was to be provided as follows:

Premises 5% on cost

Machinery and equipment 10% on carrying amount

(iv) At the year end, prepaid rates amounted to $12,895. An invoice of $12,000, relating to a maintenance contract covering the period from 1 July 2012 to 30 June 2013, was not recorded.

(v) The directors proposed a transfer of $38,000 to the general reserve and a final dividend of 3%.

(vi) The profits tax rate was 20%.

Required:

Prepare the following financial statements for management purposes:

(a) An income statement for the year ended 31 October 2012. (7 marks)

(b) A balance sheet as at 31 October 2012. (5 marks)

Aurora Ltd planned to expand its business and required additional funding of $1,500,000. Two proposals were submitted to the board of directors for consideration:

(i) The issue of $1,500,000 10% debentures at par on 1 November 2012. The debentures would be repayable 10 years later.

(ii) The issue of $750,000 10% debentures at par and 60,000 ordinary shares at a premium of 25% on 1 November 2012.

The budgeted operating profit for the year ended 31 October 2013 was $800,000 and the profit tax rate remained unchanged.

Required: (Calculations to two decimal places)

(d) Assuming that no dividend would be paid during the year ended 31 October 2013, which proposal would yield a higher return on shareholders’ equity? (2 marks)

(e) Which proposal would give rise to a higher debt ratio as at 1 November 2012? Explain the implications of having a high debt ratio? (3.5 marks)

HKET Mock (7, 2011) (Accounting for Limited)

Wealthy Limited is a trading limited company, which started the business on 1 January 2011. At the beginning of the business, the methods of raising fund were as follows:

(1) Issue 5,000,000 ordinary shares of $1 each.

(2) Issue 1,000,000 8% preference shares of $2 each.

(3) Issue 5% debentures which worth $1,500,000 in total and redeemable in 2015.

(4) $800,000 long-term loan from bank with annual interest rate 6% and repayment is over four years equally.

REQUIRED:

(a) Based on the above information, calculate the following ratios:

(Regard the whole amount of bank loan as long-term liabilities when calculating the ratio)

(i) Debt-to-equity ratio

(ii) Capital gearing ratio

The trial balance for the year ended 31 December 2011 is as follows:

Wealthy Limited
Trial Balance as at 31 December 2011
Debit / Credit
$ / $
Vehicle / 300,000
Furniture & fittings / 800,000
Accounts receivable / 3,500,000
Accounts payable / 1,000,000
Bank / 7,252,500
5,000,000 Ordinary shares, $1each / 5,000,000
1,000,000 8% Preference shares, $2 each / 2,000,000
5% Debenture / 1,500,000
Bank loan / 600,000
Purchases / 5,000,000
Sales / 9,500,000
Carriage inwards / 200,000
Discount received / 300,000
Salaries / 1,200,000
Director’s remuneration / 300,000
Office rent / 900,000
Office expenses / 250,000
Debenture interests / 37,500
Preference share dividends / 160,000
19,900,000 / 19,900,000

Other information:

(i) Bank loan interest has not yet paid.

(ii) Inventory as at 31 December 2011 is $680,000.

(iii) Accrued auditor’s fee is $100,000.

(iv) Prepaid rental expense is $75,000.

(v) Provision for doubtful debt is 1% out of the amount of accounts receivable.

(vi) Depreciation is calculated based on straight-line method, details are as follows:

Vehicles: Expected to be used for 5 years with residual value $20,000.

Furniture & fittings: Expected to be used for 10 years without residual value.

(vii) The board of directors proposes to transfer $300,000 to the general reserve and declare a dividend of $0.2 for each ordinary share.

(viii) The profit tax for this year is expected to be $450,000.

REQUIRED:

Prepare the following financial statements for Wealthy Limited:

(b) A trading and profit and loss appropriation account for internal use for the year ended 31 December 2011.

AAT 2011 (Pilot Paper 2, 8) (Accounting for Limited)

8. On 1 January 2010, HNH Limited had the following equity and non-current liabilities balances:

10% debentures, repayable in 2017 / $140,000
Issued ordinary shares / $560,000
Share premium / $100,000

The company’s authorized share capital is 1,000,000 ordinary shares of $1.00 each. On 4 April 2010, the company offered for subscription 200,000 ordinary shares of $1.00 each at $1.40 each, payable in full on application.

On 15 June 2010, applications were received for 325,000 shares. As it is an oversubscription, unsuccessful applications were rejected and cash received in respect of these shares was returned on 7 July 2010. Shares were allotted on 8 July 2010.

On 20 October 2010, the company issued 500,000 12% debentures of $1.00 each for cash at par, repayable in 2020. These were secured by the premises of the company. Debentures were fully subscribed.

REQUIRED:

(a) Prepare the necessary journal entries to record the above share and debenture issues.

(b) Prepare the section of equity and non-current liabilities extracted from statement of financial position as at 31 December 2010.

(d) Identify any THREE pros of each of the above two financing methods used by HNH Limited.

HKDSE (sample 2 2A, 9) (Limited company and Incomplete records)

BC Ltd was incorporated and commenced its business selling imported tiles on 1 January 2010. On the date of incorporation, the company issued 1 000 000 ordinary shares of $2 at par. A four-year $1 000 000 bank loan with an interest rate of 6% per annum was obtained on the same date. The following information was available:

(i) The ratio of total non-current liability to total equity (based on the year-end balances) as at 31 December 2010 was 1:4. No dividends had been proposed or paid in 2010 and 2011.

(ii) Total sales for 2011 were $3 600 000. All goods were sold at a gross profit margin of 50%.

(iii) All sales and purchases were made on credit and were evenly spread throughout the year. In 2010 and 2011, the collection period of trade receivables was maintained at 1 month, while the settlement period of trade payables was maintained at 3 months.

(iv) Closing inventory as at 31 December 2010 and 2011 was valued at $500 000 and $1 100 000 respectively.

(v) Selling and distribution expenses of $645 000 incurred in 2011 were fully paid.

(vi) Administrative expenses of $270 000 were incurred in 2011, of which one-third remained unpaid as at 31 December 2011.

(vii) In order to finance the expansion of the business, the company further issued 1 000 000 ordinary shares at $5 per share on 1 January 2011 and obtained a five-year bank loan with an interest rate of 4% per annum on the same date. The ratio of total non-current liability to total equity decreased to 1:5 immediately after the issuance of shares and the acquisition of the bank loan. The interests on all the bank loans incurred in 2011 were duly paid and properly recorded.

(viii) On 1 January 2011, the company purchased a piece of equipment for $420 000. It is the company’s policy to provide depreciation at an annual rate of 20% using the reducing balance method. The net book value of equipment as at 31 December 2010 was $480 000.

(ix) All transactions were made through the bank account of the business. On 31 December 2011, there was no cash in hand while the bank account showed a debit balance.

REQUIRED:

(a) Prepare for BC Ltd

(1) the income statement for the year ended 31 December 2011; and

(2) the statement of financial position as at 31 December 2011.

(b) As compared with 2010, many of the financial ratios of BC Ltd in 2011 had improved. Therefore, the Chief Executive Officer (CEO) of the company concluded that the performance of BC Ltd in 2011 was better. Give two reasons why the CEO’s conclusion might be incorrect. Explain your answers.

HKDSE Sample 1 (Paper 2A, 6) (Limited company and Correction Errors)

The following draft statement of financial position for Healthy Food Company as at 31 December 20X6 has been prepared:

ASSETS / $ / $
Office machinery / 148,000
Less: Accumulated depreciation / 45,300 / 102,700
Motor vehicles / 10,000
Less: Accumulated depreciation / 2,500 / 7,500
Inventories / 127,600
Account receivables, net / 85,500
Suspense account / 6,800
330,100
CAPITAL and LIABILITIES / $
Capital / 114,622
Account payables / 68,750
Rates paid in advance / 2,750
Bank loan (repayable on 31 December 20Y2) / 100,000
Draft net profit for the year / 22,068
Bank overdraft / 21,910
330,100

Subsequent to the preparation of the draft statement of financial position, the following were discovered:

(i) On comparing the bank statement with the cash book for the month of December 20X6, the following differences were found:

(1) An amount of $8,060, being receipt of dividends, had been credited directly into the bank account. The amount was recorded in the cash book as bank interest charged on the overdraft balance.

(2) A cheque of $10,000 issued for paying the deposit to acquire a motor van in February 20X7 was not yet presented to the bank for payment. The amount was recorded as the only motor vehicle of the company. Motor vehicles are depreciated at 25% per annum on cost.

(ii) Owing to an oversight, $1,300 prepaid insurance at 31 December 20X5 had been omitted from the general ledger in 20X6. Moreover, rates of $2,750 paid in advance at 31 December 20X6 had appeared as a credit balance in the trial balance.

(iii) At 31 December 20X6, a customer with an outstanding debt of $10,800 was declared bankrupt and the amount is to be written off. In addition, the allowance for doubtful debts was to be reduced by $540.

(iv) Included in the closing inventories were goods at $10,000 received from Royce Limited on a sale or return basis. No other entries had been made in respect of these goods in the books.

REQUIRED:

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

(b) Prepare the statement of financial position as at 31 December 20X6 in proper format.

HKCEE (2010, 5) (Accounting for Limited)

The following trial balance was extracted from the books of Fatima Limited as at 31 December 2009:

Debit / Credit
$ / $
Motor vehicles, at cost / 1,300,000
Office equipment, at cost / 3,590,000
Stock, 1 January 2009 / 182,200
Accumulated depreciation – motor vehicles, 1 January 2009 / 420,000
Accumulated depreciation – office equipment, 1 January 2009 / 948,000
Disposal of assets / 60,000
Share issue / 704,000
Purchases / 1,083,000
Bad debts / 57,680
Sales returns / 67,000
Selling and distribution expenses / 401,600
Administrative expenses / 264,200
Carriage inwards / 13,600
Salaries / 505,000
Rent and rates / 314,000
Ordinary dividend / 50,000
Cash at bank / 85,320
Trade debtors / 798,400
5% bank fixed deposit / 100,000
Trade creditors / 821,200
Sales / 4,270,000
500,000 ordinary shares of $2 each, fully paid / 1,000,000
Share premium / 151,300
General reserve / 140,000
Retained profits, 1 January 2009 / 297,500
8,812,000 / 8,812,000

Additional information:

(i) Stock as at 31 December 2009 amounted to $204,350 which included defective goods of $10,000. As agreed, these goods were to be returned to the supplier. No entries had been made for this return.

(ii) Free samples were sent to a customer on 29 December 2009. This was recorded as a credit sale of $900.

(iii) A motor vehicle which was purchased on 1 January 2008 for $120,000 was sold on 30 November 2009 for $60,000 through an agent. The sales proceeds received had been debited to cash and credited to the disposal of assets account. No other entries had been made. A commission of 5% on the sales proceeds was to be paid to the agent on 3 January 2010.