Report on the 2009 Tertiary Entrance Examination in

Accounting

The TEE subject Accounting was examined for the last time in 2009.

This report was written by the chief examiner with the assistance of the other members of the
examining panel. The opinions and recommendations expressed are not necessarily
representative of, or endorsed by, the Curriculum Council.

The marking key appended to this report was prepared by the examining panel, and modified
as appropriate at the pre-marker meetings. It is not intended as a set of model answers, and
is not exhaustive as regards possible alternative. It represents a standard of response that
the examiners deemed sufficient to earn full marks. Teachers who use this key should do so
with its original purpose in mind.

Candidature
Year Number Number of
who sat absentees
2009 1,313 98
2008 1,444 112
2007 1,497 138
    2006 1,485 137

Summary
While reflecting the approved weightings as contained in the syllabus, the content weightings
for practical and theory questions in the 2009 examination differed slightly from the last two
years. The theory and practical components were worth 32% and 68% respectively (30%
and 70% in 2007 and 2008). The mean score of 50.96% for the total examination was
slightly higher than in 2008 (48.31%) but significantly lower than the desirable mean of 60%.
The standard deviation was 20.91%, substantially higher than the desirable standard
deviation of approximately 15%.

The examination was considered by markers to be of appropriate length and to represent a

fair and balanced coverage of the syllabus. The spread of marks was excellent, ranging from
0% to 94%, the internal reliability of the examination was again very high and the ordering of
difficulty of questions was good. No adverse feedback was received.

Comments on specific elements

There was a marked difference between results for the theory and practical components.
Practical questions generally had means above 50%, with candidates performing particularly
well on the topics of clubs and societies, companies, budgets and depreciation and disposal
of assets. The theory component faired less well. The analysis and interpretation elements
had a particularly low mean; marginally better means resulted for the other theory questions.
The number of candidates who attempted the last question, the essay, decreased.

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As in previous years, all questions were compulsory. The distribution of syllabus topics and
the allocation of marks is shown in the table below.

Question Syllabus topic Practical Theory Marks

1 Partnerships 16 4 20
2 Analysis 3 16 19
3 Clubs 20 0 20
4 Companies 35 15 (Essay) 50
5 Budgets 18 5 23
6 Depreciation 15 5 20
7 Cash Flows 28 0 28
8 Concepts 0 10 (Essay) 20
10 (Clubs)
Total marks 136 64 200

Question 1 Partnerships
This question had an overall mean score of 55.98%.
Part A was generally done well. Some candidates did not realise that insurance expense
was for four months only. Some halved the salary which was marked as correct. Interest on
advance was not always included.
Part B was generally done well. Candidates found this question relatively easy to cover.
Part C was generally done well.
Part D was done very well.

Question 2 Analysis
This question had an overall mean score of 32.83%.
Part A was handled well from the point of view that candidates were able to identify the
correct ratio for each category of analysis. However, many struggled with the calculation of
the background information.
Part B was not particularly well handled. Candidates must respond in more depth and give
advice on recommendations to gain an improvement in the ratio.
Part C was not particularly well handled. Many candidates failed to understand that the
question was asking about limitations of ratio analysis.

Question 3 Clubs
This question had an overall mean score of 63.57%.
Part A was handled well by most candidates.
Part B was generally done well by candidates who attempted the question.
Part C was generally done well. An explanation of assets was often omitted.

Question 4 Companies
This question had an overall mean score of 62.56%.
Part A was generally done well. Debit and credit sides of the journal were often confused.
Very few candidates incorrectly completed entries for those not required. Two answers were
accepted due to a date being listed next to Retained Earnings in the Trial Balance
information.
Part B was done very well. Some candidates omitted the long term borrowings calculation.
Part C was done very well with a high average mark.
Part D was done reasonably well. Some candidates omitted final dividends.

Question 5 Budgets
This question had an overall mean score of 59.59%.
Part A was done quite well. Some candidates did not calculate receipts from debtors
correctly.
Part B was done quite well.

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Part C was generally done well, though some candidates did not think carefully about what
the question was actually asking them to attempt.
Part D was generally done well with a good discussion given.

Question 6 Depreciation
This question had an overall mean score of 53.04%.
Part A was done quite well by most candidates, reflecting more confidence in the practical
calculation requirements of this topic.
Part B was not particularly well-handled by a majority. Candidates needed to relate the
answer to the specifics of the question and should have calculated the overall loss on
disposal.

Question 7 Cash Flows

This question had an overall mean score of 52.62%.
Part A was generally done well. Candidates usually understood the requirement for interest
paid to be disclosed as an operating activity. Reconstructions of accounts was usually good.
Part B was generally done well. Only reconstruction challenges were with prepaid rent and
wages payable.
Part C was generally done well. Some missed that fifty percent was received in the financial
year.

Question 8 Concepts
This question had an overall mean score of 35.31%.
This question was not particularly well handled, nor given a reasonable attempt with any
length by a majority of candidates. A shame given the practical nature of the questions
which required candidates to apply their knowledge to a “real life” situation. Many gave too
much detail about the first part of the question – types of companies – without justifying their
recommendation and with poor arguments. Expansion of information on regulatory bodies
and on The Framework was required from several attempts. Very few followed correct essay
structure.

Issues for the relevant committee to consider

There are no issues to consider as this is the last time that this E code subject will be
externally examined.

Acknowledgements
Thank you to the co-examiners, independent reviewer, final checker, chief marker, markers
and the Curriculum Council for your support and professionalism.

Liz Criddle
December 2009

2009 examining panel

Chief examiner: Elizabeth Criddle
Examiner: Cheow Wing Wong
Examiner: Nicole Huggins

Chief marker: Alex Panarese

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 Accounting
Marking Key

General notes:
 No individual part of a question should be awarded a negative score, where negative
marks indicated would take a candidate’s mark for the Part below zero.
 Where marks are assigned to workings, it is the numbers, not the format of headings
that are important.
 Markers must not penalise consequential errors.

Question 1 (20 marks)

Workings

Insurance expense = $6 000 x 4/12

= $2 000

Interest on advance = $4 000 x 0.06 x 4/12

= $80

Profit/Loss = 125 000 – 20 000 – 42 000 – 74 000 – 2 000 – 80

= $(13 080)

1 mark total for Fin/Gen/Sell Expenses, 2 marks for Interest on adv, 1 mark for Insurance exp
= 4 marks

Interest on capital
Alicia = 40 000 x 0.035 x 6/12 = $700
Bertha = 26 000 x 0.035 x 6/12 = $455
Corrine = 18 000 x 0.035 x 6/12 = $315
1 mark for correct capital amounts (40 000, 26 000, 18 000), 1 mark for half year = 2 marks

Share of residual loss = 94 550 x 1/3 = $31 517 each

(one partner to receive $31 516) 1 mark

Part A
Profit and Loss Appropriation Account
2009 2009
30 Jun Profit and Loss 13 080 [4] 30 Jun Residual Loss
Salary Current – Alicia 31 517
Current – Alicia 30 000 Current – Bertha 31 517
Current – Corrine 50 000 [2] Current – Corrine 31 516 [1]

Interest on Capital
Current – Alicia 700
Current – Bertha 455
Current – Corrine 315 [2]
94 550 94 550

9 marks

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 Current Account – Corrine
2009 Salary 30 000 [1] 2009 Profit & Loss Appropriation
30 Jun Profit & Loss Appropriation 30 Jun Salary 50 000 [1]
Residual Loss 31 516 [1] Interest on Capital 315 [1]
Balance c/d 11 201
61 516 61 516
1 July Balance b/d 11 201

4 marks

Deduct 1 mark if no balance c/d shown in the Current a/c, or no/incorrect dates shown, or
poor cross-referencing.
Deduct 1 mark for each additional item, maximum 2 marks.

13 marks total

Part B
Up and Down
General Journal (extract)
Date Details Debit Credit
2009 Profit and Loss Appropriation 80 000
30 June Current – Alicia 30 000
Current – Corrine 50 000
Salary entitlement
Profit and Loss Appropriation 1 470
Current – Alicia 700
Current – Bertha 455
Current – Corrine 315
Interest on capital
Current – Alicia 31 517
Current – Bertha 31 517
Current – Corrine 31 516
Profit and Loss Appropriation 94 550
Share of residual loss
1 mark each entry
Deduct 1 mark for any missing narrations or date

3 marks total

Part C

‘Limited life’ is a characteristic of a partnership. [1]

The business will cease to exist in its current form when Bertha leaves and so a new
Partnership Agreement must be drawn up. [1]

2 marks total

Part D

Incorrect, due to mutual agency. [1]

Decisions made by one partner are binding on all other partners, as long as they are in the
ordinary course of business. [1]

2 marks total

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Question 2 (19 marks)
Workings
2009 2008

Profit 159 000 249 000

Operating Expenses 155 000 101 000

Current Assets 67 000 64 000

Non-Current Assets 125 000 120 000

Current Liabilities 90 000 63 000

Non-Current Liabilities 90 000 100 000

Equity 12 000 21 000

Part A

2009 2008

Ratio One - Profitability

Profit ratio = 159 000 249 000

or  18%  29%
904 000 860 000
Operating expense ratio = 155 000 101 000 [1]
 17%  12%
904 000 860 000
Ratio Two - Gearing

Debt to equity ratio = 180 000 163 000 [1]

 1 500%  776%
12 000 21 000
Ratio Three - Liquidity

Current ratio = 67 000 64 000 [1]

 74%  102%
90 000 63 000

3 marks total

Part B
Profitability (5 marks)
 Profitability measures the ability of the business to earn a return from its investment in
assets and equities. The profitability of this business is declining
 The profitability is over half of the industry average, having moved from 29% to 18%,
well below the 30% being achieved by other businesses – this is a negative trend
 Even though sales have increased, the cost of sales has increased by a greater
percentage, leading to lower margins
 The operating expense ratio has increased to 17% in contrast with the decline in the
industry average to 13% – this is a negative trend
 The main concern in relation to expenses is the 100% increase in selling and
distribution expenses – the business is not seeing improvements flowing from this
Any four well explained points = 4 marks
No marks are given for only stating if the trend is positive or negative.
 Advice to improve: decrease cost of sales for example by lessening freight costs,
increase sales of high margin stock, decrease selling expenses

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Any related advice on improvements = 1 mark

Gearing (4 marks)
 Gearing is very high and shows too much reliance on externally generated debt
 It is at a very concerning level and has almost doubled in the last year, reflecting a
large decrease in equity – this is a negative trend
 The industry average is much lower at 220%
 The decline in equity implied that the owner of the business is withdrawing more than
the annual profits from the business
Any three well explained points = 3 marks
No marks are given for only stating if the trend is positive or negative.
 Advice to improve: lower debt, less drawings.
Any related advice on improvements = 1 mark

Liquidity (5 marks)
 The current ratio has declined from 102% where the business just had enough assets
to cover short term debt, to 74%, only 74 cents to cover each dollar of debt – this is a
negative trend
 Of concern is the large increase in the overdraft
 The ratio is well below the industry average of 120% showing that other businesses
in the industry are more likely to be able to meet their short term debt requirements
Any three well explained points = 3 marks
No marks are given for only stating if the trend is positive or negative.
 Advice to improve: improve cash sales, improve debtor checks, give less credit
Any related advice on improvements = 2 marks

14 marks total

Part C
 If the lender relies on just the data presented here, they are using limited information
in their analysis of the business’ capacity. Historical information does not necessarily
predict future results.
 The information provided lacks details and more investigation would be required to
establish which specific accounts have affected the results, and to enquire about the
business owner’s ability to overcome negative trends.
 Additionally this information is provided at one point in time for the business and so
the perspective of overall prospects for the business is limited. This could be affected
by seasonal adjustments in the fashion industry and one off events such as sales.
Any two relevant and well argued points = 2 marks

2 marks total

Question 3 (30 marks)

Workings
Bar Creditors
$
Cash at Bank 74 100 [1] Balance b/d 3 070
Balance c/d 1 600 Credit Purchases* 72 630*
75 700 75 700
Balance b/d 1 600

1 mark if both Opening and Closing Balances are given correctly

Bar Profit
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 $ $ $
Bar Sales 134 700 [1]
Less Cost of Sales
Opening Inventory 17 600*
Purchases 72 630 [2] 90 230
Closing Inventory 21 000* 69 230
Gross Profit 65 470
Less Expenses
Bar Wages 47 300 [1]
Bar Profit 18 170

1 mark if both Opening and Closing Inventory are given correctly

5 marks

Raffle Profit
Raffle Receipts - Raffle Expenses = Raffle Profit
$13 300 [1] - $10 400 [1] = $2 900
2 marks

Depreciation of Equipment
$37 800 x 10% p.a. = $3 780 [1]

$3 200 x 10% p.a. x 3/12 [1] = $80

$3 780 + $80 = $3 860

2 marks

Subscriptions Income
Subscriptions Received in 2008/2009 $64 500 [1]
Add subscriptions in advance in 2008 + $0
Add subscriptions in arrears for 2009 + $0
Less subscriptions in arrears for 2008 – $500 [1]
Less subscriptions received in advance for 2009/2010 – $580 [1]
SUBSCRIPTIONS INCOME FOR 2009 $63 420
3 marks

Part A
Busso Surfing Club
Income and Expenditure Report
For the year ended 30 June 2009
$ $
INCOME
Subscriptions 63 420 [3 + 1]
Bar Profit 18 170 [5 + 1]
Raffle Profit 2 900 [2 + 1] 84 490

EXPENDITURE
Insurance 1 500 [1]
Trophies 540 [1]
Cleaners’ Wages 3 200 [1]
Depreciation of Equipment 3 860 [2 + 1] 9 100
Surplus [1] 75 390
Deduct 1 mark for each additional item (e.g. Equipment), maximum –3 marks
20 marks total

Part B

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(i) + 1 mark for a cash control principle – to a maximum of 1 mark
+ 1 mark for an inventory control principle – to a maximum of 1 mark
+ 1 mark for an asset control principle – to a maximum of 1 mark
*This list is not exhaustive – any reasonable suggestion should be awarded 1 mark

Cash Control
1. The committee member with the responsibility for memberships may collect subscription
dues, but the Treasurer records it in the Club’s financial records.
2. The secretary of the club may open the mail and record the receipt of cheques and then
pass on the cheques to the Treasurer who records the cheques in the Club’s financial
records.
3. The Club member working behind the bar that day and the Treasurer may clear the bar’s
cash register regularly and record it in the Club’s financial records.
4. The Treasurer would also compare the cash being banked with the cash register rolls at
the end of each day.
5. The Treasurer would check the cash being banked with the Club’s records of cash
receipts at the end of each day.
6. The Treasurer would bank cash received from Bar, Subscriptions, Raffles etc at the end
of each day.
7. The Treasurer should write out all cheques for purchases for items such as certificates,
surfboards, first aid kits, advertising their courses and so on.
8. The Treasurer should be the only Club member who can sign cheques.
9. The Committee member in charge of the Bar or Raffle or Training courses and so on
should order supplies, but the Treasurer should write the cheque to pay for them.
10. The Treasurer should set up and maintain the petty cash system.
11. The Treasurer should complete a bank reconciliation, comparing the bank statement with
the Club’s financial records at the end of each month.
12. At the commencement of each new financial year, the Treasurer should submit a cash
budget for the coming year to the members of the Club. At the end of the financial year,
the Treasurer should compare the actual figures with the budget and present those
figures to the Club members, and action taken as necessary to ensure the cash inflows
and outflows are sufficient to keep the Club running.
13. The Committee member in charge of the bar should have an accurate and detailed
record of all of the bar assets, including all of the different lines of alcohol, potato chips,
all the glasses on hand and so on. The Treasurer should have an accurate and detailed
record of all of the Club’s assets, including items such as the surfboards, jet skis,
equipment and so on.

Inventory and Asset Controls

14. The Treasurer should conduct regular stocktakes to track the number of different lines of
alcohol, potato chips, all the glasses on hand and so on.
15. The Club should invest in a computer program to facilitate the recording of purchases
and sales and stocktakes to reconcile inventory.
16. The Committee member in charge of the bar and the Treasurer should control the bar
assets such as cash, alcohol, food, glasses and so on and the President and the
Treasurer should control the Club’s assets such as cash, the surfboards, jet skis,
equipment and so on.

3 marks total

(ii)
Asset Definition

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  Future Economic Benefit – the bar inventories include items such as the alcohol, soft
drinks, potato chips etc. These items are likely to be sold in the future to Club
members so the receipt of monies from the sales is a future economic benefit. [1]
 Controlled By An Entity – the items in the bar have been purchased by the Club to be
sold at the Club to the Club’s members. No other entity is able to sell or use the bar
inventories so they are controlled by the Club. [1]
 Past Transaction/Event – the bar inventories were originally purchased for cash or
from creditors to now sell to the Club’s members. Therefore the original purchase of
the inventory items from suppliers was a past transaction. [1]

Asset Recognition Criteria

 Probable Economic Benefits will be realised – it is more likely than not that the bar
inventories will be sold and the future economic benefits will be realised. [1]
 Measured Reliably – the asset value can be measured reliably as there will be a
purchase price for all items at which the inventories can be reliably measured, without
bias or persuasion. [2]

As the bar inventories satisfy all three elements of the asset definition and the two
recognition criteria, it can be deemed appropriate that the bar inventory has been listed as an
asset in the records of the Busso Surfing Club. [1]

Deduct 2 marks if the answer does not specifically relate to the bar inventories and/or the
Busso Surfing Club.
7 marks total

Question 4 (35 marks)

Part A
Item (i) No Entry
Item (ii) No Entry for 1 June 2009

Shimmers Ltd
General Journal
Date Details Debit Credit
Shares Cash at Bank [1] 1 000 000
allotted on Application [1] 1 000 000
30 June Application monies received
2009

Item (iii)

Item (iv)

Application [1] 1 000 000

Share Capital [1] 1 000 000
Shares allotted
Interim Dividend – Ordinary [1] 100 000
Cash at Bank [1] 100 000
Interim dividend paid to Ordinary Shareholders
Final Dividend – Ordinary [1] 97 000
Final Dividend – Preference [1] 24 000
Cash at Bank [1] 121 000
Paid final dividends declared for year ended
30 June 2008

Item (v) No Entry

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Each debit and credit entry must have the correct account and figure to earn 1 mark.
If no narrations, deduct 1 mark per entry up to a maximum of 2 marks.
If journals are raised for item (i),(ii) 1 June 2009 resolution and (v), deduct 1 mark per entry.
If the closing entry to Retained Earnings is prepared for (iii) or (iv), award full marks.

9 marks total

Part B

Workings

*Revenue $5 119 000 (sales) [1]

+ $45 000 (interest received) [1]
+ $36 000 (dividends received) [1]
+ $30 000 (proceeds from sale of plant & machinery) [1]
______________
$5 230 000
**Expenses $2 800 000 (cost of sales) [1]
+ $1 746 000 (other expenses) [1]
+ $ 20 000 (carrying amount of plant & machinery sold) [1]
$4 566 000
Revenue [* 4 marks] 5 230 000
Expenses [** 3 marks] (4 566 000)
Income Tax expense [1 mark] (199 200)

Profit $ 464 800

Deduct 1 mark for each additional item, maximum –3 marks

8 marks total

Part C
(i)
Workings
*Long-term borrowings:
$150 000 (Bank Loan) - $50 000 (current portion of bank loan due) [1] + $170 000 (mortgage
loan) [1]
Shimmers Ltd
Balance Sheet (extract)
As at 30 June 2009

Current Liabilities
Trade and other payables [1] 468 000
Debentures [1] 100 000
Bank Loan [1] 50 000
Current Tax Liability [1] 199 200
Total Current Liabilities 817 200

Non-Current Liabilities

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 Borrowings *[2] 270 000
Total Non-Current Liabilities 270 000
Total Liabilities 1 087 200

Deduct 1 mark for each additional item, maximum –2 marks

6 marks total

(ii)

Property Plant and Equipment

Freehold Land (at fair value) $1 100 000 [1]
Buildings (at fair value) $750 000 [1]
Less: Accumulated Depreciation 33 000 [1] 717 000
Plant and Machinery (at cost) 570 000 [1]
Less: Accumulated Depreciation 172 000 [1] 398 000
Fixtures and Fittings (at cost) 98 000 [1]
Less: Accumulated Depreciation 39 000 [1] 59 000
Total property, plant and equipment 2 274 000

7 marks total

Part D

Shimmers Ltd
Statement of Changes in Equity (extract)
For the year ended 30 June 2009

RETAINED EARNINGS
Balance at start of period 660 000 [1]
Profit for the period 464 800 [1]
Total for the period 1 124 800
Interim dividends paid (100 000) [1]
Final dividends paid (121 000) [1]
Balance at end of period 903 800 [1]

Deduct 1 mark for each additional item, maximum -2 marks.

5 marks total

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Question 5 (23 marks)

Part A

Workings

Receipts from Cash Sales/Accounts Receivable for June 2009

Sales Cash Credit
Cash sales 60 000
May credit sales (31 May) 54 000 (45%) [1]
June credit sales (140 000) 77 000 (55%) [1]
60 000 131 000

Payments to Accounts Payable for June 2009

Purchases Credit
May credit purchases (31 May) 63 000 (60%) [1]
June credit purchases (120 000) 48 000 (40%) [1]
111 000

Goons Trading
Cash Budget
For the month ended 30 June 2009

Cash balance, 1 June 9 000 [1]

Receipts
Cash sales 60 000 [1]
Accounts receivable 131 000 191 000 [2]
200 000
Payments
Accounts payable 111 000 [2]
Operating expenses 72 000 [1]
Bank loan 14 500 [1]
Interest on loan 100 [1]
Equipment 6 500 204 100 [1]
Cash balance (overdraft), 30 June (4 100)

Deduct 1 mark if the closing balance is not shown as overdraft.

10 marks total

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Part B

Sales 200 000 [1]

Less: Cost of Sales
Opening Inventory 30 000*
Add: Purchases 120 000 [1]
150 000
Less: Closing Inventory 40 000*
110 000
Gross Profit 90 000
Less: Operating Expenses
Operating Expenses 74 000 [1]
Interest on Loan 100 74 100 [1]
Profit 15 900

*1 mark for including both opening and closing inventory

5 marks total

Part C
June July
Balance of May credit sales 54 000 -
June credit sales (140 000) 77 000 63 000 (45%)
June cash sales (60 000) ..60 000 -
191 000 63 000 [3]

No marks for wrong answer.

3 marks total

Part D

The cash balance as at 30 June 2009 is expected to be a deficit of $4 100. The business
may not have an overdraft facility with its bank; this situation will have to be rectified as a
start. [1]

If the business wishes to go ahead with the campaign, it will have to find at least another
$24 100. ($4 100 to avoid an expected negative bank balance as at 30 June 2009, as well
as $20 000 to pay for the cost of the advertising campaign). [1]

Measures that will need to be looked at include:

renegotiate the bank loan by delaying the repayment deadline
borrow the required amounts on a new bank loan
give incentives to credit customers to pay earlier (45% of credit customers pay a
month after the sales), i.e. collect more in May
postpone the purchase of the new equipment, if possible
negotiate and delay the payment of Accounts Payable in May
review operating expenses to find savings
increase in capital contribution from owners.
1 mark each to a maximum of 3 marks

5 marks total

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Question 6 (20 marks)

Part A

Workings

1 April 2007 – 30 June 2007 Depreciation

9PR 100 = $220 000 x 20% [1] x 3/12 [1]
= $11 000

1 July 2007 – 30 June 2008 Depreciation

9PR 100 = $220 000 - $11 000 = $209 000 [1] x 20% [1]
= $41 800

1 July 2008 – 30 June 2009 Depreciation

9PR 100 = $220 000 - $11 000 - $41 800 = $167 200 [1] x 20%
= $33 440

30 September 2008 – 30 June 2009 Depreciation

1AKW 100 = $310 000 x 20% x 9/12 [1]
= $46 500

1 December 2008 – 30 June 2009 Depreciation

1BOS 201 = $315 000 x 20% x 7/12 [1]
= $36 750

TRUCK COST ACCUMULATED DEPRECIATION

9PR 100 $220 000 [1] $11 000 + $41 800 + $33 440 = $86 240 [5]
1AKW 100 $310 000 [1] $46 500 [1]
1BOS 201 $315 000 [1] $36 750 [1]

$845 000 $169 490

Mack’s Trucks
Balance Sheet (extract)
as at 30 June 2009

NON-CURRENT ASSETS
Trucks $845 000 [3+1]
Less Accumulated Depreciation of Trucks $169 490 [7+1] $675 510

Deduct 2 marks if Truck 9PR200 is included.

Listing of individual trucks/accumulated depreciation is acceptable.

12 marks total

Part B

(i)
 A depreciable item is a tangible, non-current asset. An asset is a future economic
benefit controlled by an entity as a result of a past transaction or event. A non-
current asset is an asset which will be controlled by the entity for longer than the
current accounting period. The trucks would be kept for a number of years to haul
the machinery and contribute to revenue earning until they failed to do so.
 Tangible non-current assets are depreciable – items that have a physical nature.
You can see and touch a truck.
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  Wear and tear is use in excess of that which maintenance can restore. The trucks
would eventually start to require more costs to be expended on mechanical and even
structural (tyres etc) items than they would be earning in revenue.
 Limited life – the trucks are useful for revenue earning over a number of accounting
periods but will eventually decline in revenue earning capacity due to wear and tear
and/or obsolescence
 Obsolescence – the truck may become obsolete because of new improvements to
trucks which won’t make the haulage of such heavy machinery take a toll on the
mechanical components so the new trucks become a far more attractive option than
the current asset that requires continual maintenance.

1 mark for each valid reason, but it must relate to the trucks – to a maximum of 4 marks

4 marks total

(ii)

Workings

Truck 9PR 200 purchased for $220 000

Total depreciation from 1 April 2007 until 30 September 2008 was $61 160

1 April 2007 – 30 June 2007 Depreciation

= $220 000 x 20% x 3/12
= $11 000 (same as 9PR 100)

1 July 2007 – 30 June 2008 Depreciation

= $220 000 - $11 000 = $209 000 x 20%
= $41 800 (same as 9PR 100)

1 July 2008 – 30 September 2008 Depreciation

= $220 000 - $11 000 – $41 800 = $167 200 x 20% x 3/12
= $8 360

Total Accumulated Depreciation

= $11 000 + $41 800 + $8 360
= $61 160

Carrying amount of 9PR 200 when traded in was $158 840

= $220 000 - $61 160
= $158 840

It was in fact traded in on 30 September 2008 for $90 000.

Loss on disposal = $158 840 – $90 000 = $68 840 [1*]

Explanation:
The business had underdepreciated [1] the truck because the records showed the truck was
valued at $158 840 but traded in for just $90 000; a $68 840 loss [1*+1] on the disposal of
the asset. In this case, the business was not recording a high enough depreciation expense
for the truck and hence the profit for Mack’s Trucks would have been overstated [1].

4 marks total

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Question 7 (28 marks)

Part A

Workings

Allowance for Doubtful Debts

Bal c/d 4 660 Bal b/d 3 765
Bad debts [1] 5 915 Doubtful debts expense [1] 6 810
10 575 10 575

1 mark for both opening and closing balances

Accounts Receivable
Bal b/d 82 830 Bal c/d 102 520
Sale (net) [1] 892 680 Bad debts [*3 + 1] 5 915
Discount allowed [1] 7 640
______ Cash [1] 859 435
975 510 975 510

1 mark for both opening and closing balances

Cash receipts from customers = $859 435 [8] + 2 160 commission revenue [1] = $861 595
9 marks total

Part B

Workings

Cost of Sales
Opening Inventory 110 330 [1]
Add: Purchases 648 340 [1]
758 670
Less: Closing Inventory 133 790 [1]
Cost of Sales (given) 624 880

Accounts Payable
Bal c/d 76 930 Bal b/d 51 630
Discount received [1] 7 030 Purchases [*3 + 1] 648 340
Cash [*1] 616 010 _______
699 970 699 970

1 mark for both opening and closing balances

Prepaid Rent
Bal b/d 1 320 Bal c/d 1 460
Cash [**1] 8 340 Rent expense [1] 8 200
_____ _____
9 660 9 660

1 mark for both opening and closing balances

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 Wages Payable
Bal c/d 3 470 Bal b/d 2 790
Cash [***1] 179 960 Wages expense 180 640
_______ ______
183 430 183 430

1 mark for both opening and closing balances

Cash Payments to Suppliers and Employees

Accounts payable 616 010 [*7]

Rent 8 340 [**3]
Wages 179 960 [***2]
Other expenses 16 622 [1]
820 932

Deduct 1 mark for each additional item, maximum -2 marks.

13 marks total

Part C
Workings

Capital
Bal c/d 328 371 Bal b/d 308 931
Drawings 11 000 Profit and Loss [*1] 30 440
339 371 339 371

1 mark for both opening and closing balances

Pesta
Cash Flow Statement (extract)

Cash flows from investing activities

Proceeds from disposal of machinery (10 900 x 50%) [2] 5 450
Net cash used in investing activities 5 450

Cash flows from financing activities

Payment of borrowings [1] (12 000)
Drawings paid [*2] + [1] (11 000)
Net cash used in financing activities (23 000)

Deduct 1 mark for each additional item, maximum -2 marks.

6 marks total

Question 8 (25 marks)

Three types of companies (6 marks)

Proprietary company: Between 1-50 non-employee shareholders either limited by shares or

unlimited. [2]
Either:
 Small: must meet two of these criteria: Assets under $5 million, less than 50
employees, gross revenue under $10 million. [1]
 Large proprietary company: does not meet above criteria. [1]
The third type is:
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  Public company: shares are available to the general public, with no set limit.
More stringent reporting requirements, regulated by the Australian Stock Exchange
(etc.) [2]

(2 relevant points = 2 marks)

Recommendation as to which company to form (3 marks)

Small proprietary limited company recommended [1] because:

 The size of the proposed company meets the relevant criteria: less than 50
employees and gross revenues under $10 million. [1]
 One of the advantages of this type of company is that there is no sale of shares to the
general public, so Yeow and Zane would retain some control, while still gaining the
advantages of limited liability. [1]
(Any 2 relevant points of explanation to back up decision = 2 marks)

Role of three main regulatory bodies in the regulation of company accounting

practice. (6 marks)
Australian Securities and Investments Commission (ASIC):
 Main role in relation to companies is to administer corporate legislation. [1]
Any one of the following points [1]:
 It is assigned by the Federal Government with the primary regulatory role for both
listed and unlisted companies: in other words, the AASB sets the standards and the
ASIC enforces them.
 Interprets Accounting Standards where this is necessary and issues these
interpretations through the medium of Accounting Practice Notes. Compliance with
AASB standards is required under Corporations Law and is enforced by the ASIC.
Australian Accounting Standards Board (AASB):
 Main role in relation to companies is to develop and amend Accounting Standards,
including the provision of standards for disclosure/presentation of information from all
companies that are reporting entities. [1]
Any one of the following points [1]:
 To develop a conceptual framework for the purpose of evaluating proposed
Accounting Standards and International Standards.
 To make accounting standards for the purpose of the Corporations Act.
 To participate in and contribute to the development of a single set of Accounting
Standards for worldwide use. The AASB must refer to international Accounting
Standards (IASB) in the preparation of Accounting Standards for use in Australia. It
must carry out a cost benefit analysis of the impact of a proposed accounting
standard to be used in Australia unless that standard is based on an existing
international standard.
Australian Stock Exchange Ltd (ASX):
 Role of the ASX extends only to those public companies which are listed on the Stock
Exchange. Its main concern in relation to the preparation and presentation of
accounting reports is with the presentation and disclosure of financial information by
public listed companies. [1]
 Also aims to ensure that all companies listed on the Stock Exchange act in a manner
which is at all times in the best interests of shareholders and the general public good.
The ASX has Listing Rules by which it specifies the form, content and frequency of
published financial statements for public companies. [1]
(1 mark each for two relevant well explained points = 2 marks)

Importance of the Framework when preparing General Purpose Financial Reports.

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(4 marks)
General statement about the importance of preparing reports so that the users of the
financial information can make decisions about the allocation of scarce resources eg.
Financial institutions lending, shareholders investing. [1]

Explain any three of the following [3]:

 Relevance: Information is relevant when it influences the economic decisions of
users by helping them evaluate events or to confirm or correct their evaluations of the
situation. Users should be able to both predict and confirm. The relevance of
information is also affected by its nature and materiality. Information is material if its
omission or misstatement could influence the decisions of users. Materiality is
dependent upon the size and/or nature of the item.
 Reliability: Information is reliable when it is free from material error and bias and can
be depended upon by users to represent items faithfully. To be reliable, information
must faithfully represent the transactions or events it purports to represent. Inherent
difficulties can result in a less than faithful representation. Information must also be
presented in accordance with its substance reporting economic reality and not merely
legal form. To be reliable, the information must be neutral and free from bias. The
report preparers must also exercise prudence by exercising a degree of caution when
making judgments and estimates. To be reliable, the information must also be
complete and without material omissions.
 Comparability: Users must be able to compare the financial reports of an entity
through time in order to be able to identify trends. They also need to be able to
compare different entities in order to be able to evaluate their relative financial
position, financial performance, and cash flow. Users must be informed of the
accounting policies employed in the preparation of the report and any changes in
those policies. The need for comparability should not be confused with keeping
records uniform over time.
 Understandability: Information should be readily understandable by users, assuming
they have a reasonable knowledge of business and economic activities. Complex
information should not be excluded from the financial reports though.
(Any three well-explained points = 3 marks)

Three possible sources of finance (3 marks)

1 mark each for well argued answer such as:
Shares: may dilute ownership. Should pay dividends if profits are made, no demand
on funds if loss made. [1]
Debentures: Loan from debenture holders is a liability. Requires interest payments
from the business and this commitment must be met before any dividend payment.
[1]
Loan from a financial institution.[1]
Accept other reasonable answers.

Recommend one source of finance (1 mark)

Introduction, conclusion, correct essay structure and English communication = 2

marks

End of marking key

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