Fanling Lutheran Secondary School

FANLING LUTHERAN SECONDARY SCHOOL 20152016 S6 MOCK EXAMINATION 2

BUSINESS, ACCOUNTING AND FINANCIAL STUDIES PAPER 2A Accounting Module

Date : 20th January, 2016 Time allowed: 10:15 am - 12:30 pm (2 hour 15 minutes) This paper must be answered in English

INSTRUCTIONS: 1. There are three sections in this paper

2. All questions in Section A and B are COMPULSORY. You are required to answer ONE of the two questions in Section C.

3. Write your answers in the answer sheet. Start EACH question (not part of a question) on a NEW page.

4. This paper contains 7 pages.

______1516 S.6 BAFS (II) Mock Examination Page 1 By M. C. WONG SECTION A (24 marks) Answer ALL questions in this section.

1. The cash book of Clement Chan as at 31 December 2014 had a credit balance of $8,500. An examination of the cash book and bank statement revealed the following:

(i) A standing order payment of $550 for an electricity bill, made on 27 December 2014, had not been recorded in the cash book. (ii) The bank had wrongly credited Clement Chan’s account with a receipt of $86 which should have been credited to the account of another bank account holder, Cherry Chan. (iii) The receipt side of the cash book was understated by $1,200. (iv) Clement Chan found that the following cheques issued during December 2014 had not been presented for payment: Cheque No. Amount $ 45670 2,342 45673 42,342 46678 3,244 (v) Clement Chan deposited cheques from debtors totalling $2,700 into the business bank account on 31 December 2014, but this transaction had not been recorded in the bank statement. (vi) Bank charges of $150 had not been entered into the cash book. (vii) A cheque for $6,900 issued to pay for goods purchased was mistakenly recorded as $690 in the cash book. (viii) A credit transfer of $4,100 from Mrs Tong on 20 December 2014 had not been recorded in the cash book.

REQUIRED: (a) Update the cash book of Clement Chan, showing the adjusted balance on 31 December 2014. (b) Prepare a bank reconciliation statement as at 31 December 2014, commencing with the adjusted cash book balance. (Total 6 marks)

2. Max Wong, a sole trader, uses a three-column cash book to keep records of cash and bank transactions. As at 1 November 2015, the cash book showed cash and bank balances of $58,700 and $77,335, respectively. The business had the following transactions during November 2015: 2014 Nov 1 Received $41,200 in cash from Joseph Lee, a customer, in full settlement of his account of $42,300. “ 5 Settled the account of Daniel Chin, a supplier, by a cheque of $27,000. A cash discount of 10% was received. “ 11 Paid rates of $38,300 by cheque. “ 12 Issued a cheque for $71,060 to settle Minnie Mok’s account of $74,800. “ 16 Made cash sales of $22,830. “ 18 Deposited $80,000 cash into the bank. “ 20 Paid salaries of $88,900 by cheque. “ 22 Made cash sales of $13,000. The amount was immediately banked. “ 29 Received from Jessie Man, a customer, cash $21,000 in settlement of a debt of $22,000. Max Wong took $12,000 for personal use and banked the rest of the sum.

REQUIRED: (a) Draw up a three-column cash book to record the above transactions and balance off the cash book at the end of the month. (b) Post the totals of the discount columns to the relevant ledger accounts in the general ledger. ______1516 S.6 BAFS (II) Mock Examination Page 2 By M. C. WONG (Total 6 marks)

3. The budgeted information for Larry Co for the year ended 31 December 2016 (based on three different production levels) is as follows: Production and sales level: 50,000 units 100,000 units 150,000 units Direct labour $500,000 (i) $1,500,000 Direct materials $2,000,000 $4,000,000 $6,000,000 Manufacturing overheads $1,000,000 (ii) $1,000,000 Non-manufacturing overheads $1,000,000 (iii) $1,200,000

The selling price is $100 per unit. There is no opening inventory.

REQUIRED: (a) Fill in the missing figures and classify the costs as a variable cost, mixed cost or fixed cost. (b) Prepare budgeted income statements for the year ended 31 December 2016 (based on production and sales level of 200,000 units) using absorption costing and marginal costing, respectively. (Total 8 marks)

4. Norman started his business on 1 January 2014. The financial year ends on 31 December. He decided to use the straight-line method to depreciate the non-current assets of his business. The depreciation rate is 20% per annum. Depreciation was charged on a monthly basis.

Norman purchased a new equipment for his business on 1 April 2014. The detail was as follows: (i) List price of the equipment was $180,000. Norman was given a 15% trade discount. (ii) A power supply unit costing $6,000 was designed according to the requirement of Norman. (iii) Delivery cost of the equipment was $3,200. (iv) During its first nine months of operation, maintenance cost of the equipment totalled $3,000. (v) Insurance that must be paid for the delivery of the equipment to the business amounted to $1,800. (vi) Training cost for workers on the operation of the equipment amounted to $8,000. (vii) Repair cost after the equipment had been used for nine months amounted to $2,000. (viii) Installation cost of the equipment amounted to $4,000.

REQUIRED: (a) Calculate for Norman the cost of the new equipment. (b) Calculate the depreciation charge for the equipment for the year ended 31 December 2014. (Total 4 marks)

______1516 S.6 BAFS (II) Mock Examination Page 3 By M. C. WONG SECTION B (36 marks) Answer ALL questions in this section.

5. The trial balance of Michael Chan’s business as at 31 March 2014 showed a difference which was posted to a suspense account. An income statement for the year ended 31 March 2014 was prepared and a net profit figure of $32,555 was shown. The following errors were discovered later. They accounted for the entire difference in the trial balance. (i) Carriage outwards account had been overcast by $1,664. (ii) The maintenance cost for the office machine of $3,500 had been debited to the office machinery account. (iii) Discounts received of $2,100 had been correctly entered in the discounts account but posted to the credit side of the personal account. (iv) A cash sale of $25,500 to Samuel Cheng had been treated as credit sales. (v) The sales journal was undercast by $3,000 and the returns outwards journal was overcast by $2,510. (vi) A debt of $10,000, written off as bad in 2012, was received in full during the current year by cheque. No entry had been made for the recovery.

REQUIRED: (a) Show the journal entries necessary to correct the above errors. (Narrations are not required.) (b) Calculate the correct figure of net profit for the year ended 31 March 2014. (Total 10 marks)

6. Yummy Potato Chips Co produces and sells one type of potato chip. Budgeted information for the following year is as follows: Selling price $20 per bag Projected demand 1,000,000 bags Direct labour $1.5 per bag Direct materials $6 per bag Variable production overheads $4 per bag Fixed production overheads $1,000,000 per annum Delivery cost $0.5 per bag Marketing expenses $4,000,000 per annum

REQUIRED: (a) Calculate the contribution margin ratio. (b) Calculate the margin of safety in dollars. (c) Calculate the budgeted net profit for the following year.

The marketing manager suggests reducing the selling price by 25%. He estimated that the demand for the product will double. The company has excess capacity to meet the increase in demand for potato chips. ______1516 S.6 BAFS (II) Mock Examination Page 4 By M. C. WONG REQUIRED: (d) Should the marketing manager’s suggestion be adopted? Show all calculations. (Total 8 marks)

7. Michael, Nick and Otto were partners, sharing profits and losses in the ratio of 1 : 2 : 1. Their statement of financial position as at 31 December 2016 was prepared as follows:

Michael, Nick and Otto Statement of Financial Position as at 31 December 2016 $ $ $ Non-current assets Office equipment, at net book value 268,000 Motor vehicles, at net book value 200,000 468,000 Current assets Inventory 36,889 Trade receivables 56,400 Non-trade receivables 1,941 95,230

Less Current liabilities: Bank overdraft 3,580 Trade payables 34,450 38,030 Net current assets 57,200 525,200 Financed by: Capital accounts: Michael 200,000 Nick 150,000 Otto 120,000 470,000

Current accounts: Michael 2,500 Nick 3,501 Otto (801) 5,200 475,200 Non-current liabilities Bank loan 50,000 525,200

The partners agreed to change the profit and loss sharing ratio to 2 : 2 : 1 starting from 1 January 2017. Goodwill was to be valued at $21,000. The goodwill account was to remain in the books of the partnership.

Other information: (i) Office equipment was to be revalued to $286,000 while motor vehicles were to be revalued downwards by $20,000. Inventory $1,000 had to be written off. (ii) An allowance for doubtful accounts at 5% was to be made for trade receivables. (iii) The new partnership would maintain a fixed capital totalled $500,000, contributed by partners based on the new profit and loss sharing ratio. Any surplus or deficit would be transferred to their respective current accounts.

______1516 S.6 BAFS (II) Mock Examination Page 5 By M. C. WONG REQUIRED: (a) Prepare the revaluation account. (b) Show the partners' capital accounts in columnar form.

During the year ended 31 December 2017, the new partnership made a net profit of $30,000. Depreciation had been charged on all non-current assets at 25% per annum on the net book value.

The following balances were extracted from the books as at 31 December 2017: $ Inventory 81,000 Trade receivables, net 42,000 Non-trade receivables — Trade payables 38,200 Bank 115,080

Owing to unforeseen circumstances, the partnership was dissolved on 31 December 2017 on the following terms: (i) The office equipment was taken over by Michael for $200,000. (ii) All motor vehicles and inventory were taken over by Otto for $250,000. (iii) A total of $40,000 was collected on trade receivables. (iv) The trade payables were paid in full for $37,000. (v) Realisation expenses paid amounted to $6,000. (vi) The bank loan was repaid by Michael on behalf of the partnership.

REQUIRED: (c) Draw up the realisation account. (d) Draw up partners’ capital account in columnar form. (Total 18 marks)

______1516 S.6 BAFS (II) Mock Examination Page 6 By M. C. WONG SECTION C (20 marks) Answer ONE question in this section.

8. On 1 January 2017, Johnny Choi’s business had the following assets and liabilities: land $863,000; inventory $82,490; trade receivables $256,000; prepaid insurance $1,200; bank $12,000; trade payables $218,700; accrued salaries $11,400.

During 2017, Johnny did not keep a full set of accounts and could only provide the following information for the year ended 31 December 2017:

(i) Cash payments: Cash banked $87,000 Motor expenses $4,500 Purchases $155,000 Cash receipts: All cash receipts were from cash sales. Bank payments: Equipment $172,000 Trade payables $115,800 Water and electricity $22,700 Insurance $5,000 Donations $2,000 Motor vehicles $260,000 Rent (14 months ended 28 February 2018) $21,000 Wages and salaries $80,000 Bank loan interest $3,000 Bank receipts: Trade receivables $194,000 Cash $87,000 Commission income $3,500 Bank loan $280,000 (ii) Water and electricity expenses of $900 and half of the insurance payment were related to Johnny’s own apartment. (iii) During the year, Johnny took goods of $2,100 and cash of $1,800 each week for his personal use. (iv) On 1 September 2017, the business borrowed a 10-year bank loan of $280,000 at an interest rate of 12% per annum. (v) Depreciation policy: Land No depreciation Equipment 10% per annum on net book value Motor vehicles 20% per annum on a reducing-balance basis A full year’s depreciation is to be charged in the year of acquisition. (vi) Balances of some of the assets and liabilities as at 31 December 2017: Inventory $105,000 Trade receivables $230,000 Trade payables $123,000 Cash $1,000 Prepaid water and electricity $1,710

______1516 S.6 BAFS (II) Mock Examination Page 7 By M. C. WONG REQUIRED: (a) Prepare an income statement for the year ended 31 December 2017. (b) Prepare a statement of financial position as at 31 December 2017. (Total: 20 marks)

9. Acer Engineering Equipment Ltd operates in Shenzhen and produces excavators and cranes. The company plans to produce 500 excavators and 200 cranes in the coming year. Their cost information is as follows:

Excavators Cranes Per unit: $ $ Direct materials 330,000 540,000 Direct labour 20,000 18,000 Variable manufacturing overheads 50,000 50,000 Fixed manufacturing overheads 2,500 2,500 402,500 610,500

A breakdown of the fixed manufacturing overheads is as follows: $ Depreciation on factory machinery 175,000 Factory manager’s salary 375,000 Factory rent 1,200,000

A manufacturer in Guangzhou has offered to supply Acer Engineering Equipment Ltd with 500 excavators and 200 cranes for $405,000 and $597,500 each, respectively. The offer requires that both the excavators and cranes be purchased together. If Acer Engineering Equipment Ltd buys from the outside supplier, it will scrap its own factory machinery and close the factory. It will be able to find another job for the factory manager and will not need to pay him compensation. The landlord will also allow the company to terminate the tenancy without penalty.

REQUIRED: (a) Should the company make the excavators and cranes itself or buy them from the outside supplier? (b) Suppose the $1,200,000 in factory rent now becomes a depreciation expense. Would the company’s decision be the same? (c) Ignore the information provided in part (b). Assume that the production levels of excavators and cranes are now 1,200 and 1,000 units, respectively. Should the company make or buy these items? (Total 20 marks)

END OF PAPER

______1516 S.6 BAFS (II) Mock Examination Page 8 By M. C. WONG