2002-CE

P ACCT HONG KONG EXAMINATIONS AUTHORITY

HONG KONG CERTIFICATE OF EDUCATION EXAMINATION 2002

PRINCIPLES OF ACCOUNTS

8.30 am – 11.00 am (2½ hours)

This paper must be answered in English

Answer FIVE questions:

THREE from Section A (42%), and

TWO from Section B (58%).

All workings must be shown.

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SECTION A

Answer any THREE questions from this section. Each question carries 14 marks.

1. On 30 April 2002, the following balances were extracted from the books of
Wilson Manufacturing Company:

$
Sales 9 890 400
Purchases of raw materials 4 372 000
Carriage inwards 58 000
Carriage outwards 83 840
Stocks, 1 May 2001
Raw materials 225 522
Work in progress 30 180
Finished goods 194 500
Plant and machinery, at cost 980 000
Office equipment, at cost 385 000
Rent and rates 395 250
Electricity and water 134 400
Wages and salaries
Direct labour 491 100
Indirect labour 240 000
Administrative staff 910 150
Repairs to machinery 18 928
Other production expenses 326 400
Other administrative expenses 198 685

Additional information:
(i) Stocks as at 30 April 2002:

$
Raw materials 115 290
Work in progress 94 840
Finished goods 181 900

(ii) Depreciation was to be provided for:

Plant and machinery 15% on cost

Office equipment 20% on cost

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 (iii) Salaries of administrative staff included an amount of $100 000
paid to the factory manager.

(iv) Electricity and water was to be apportioned as follows:

Factory 75%
Administration 25%

(v) Rent and rates was to be apportioned as follows:

Factory 80%
Administration 20%

Required:

(a) Briefly explain the difference between direct costs and indirect
costs. (2 marks)

(b) Calculate the following for Wilson Manufacturing Company for

the year ended 30 April 2002:

(i) prime cost; (3 marks)

(ii) total factory overheads; and (3 marks)

(iii) production cost of each unit of finished goods, assuming

that Wilson Manufacturing Company had produced
400 000 units of finished goods during the year. (3 marks)

(c) Prepare the trading account of Wilson Manufacturing Company for

the year ended 30 April 2002. (3 marks)

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2. (A) A sole trader notices that there is an overdraft balance in his
business bank account. He wants to include his personal bank
balance on the balance sheet of his business. What is your advice
and why would you give such advice? (2 marks)

(B) On the date of the financial year end, 31 March 2002, the bank
statement of Don Limited showed a credit balance of $108 916 and
the cash book showed a debit balance of $104 337. An
examination of the bank column in the cash book and the bank
statement disclosed the following:

(i) The following cheques had not yet been presented to the
bank for payment:
Cheque Number $
102331 4 000
102345 7 400

On 31 March 2002, the company instructed the bank to

stop payment of the cheque numbered 102331, which was
issued to a supplier. A service charge of $60 had been
debited by the bank for this service on the same date.
These had not been recorded in the books.
(ii) A lodgement of $9437 on 30 March 2002 was not
recorded by the bank until 1 April 2002.

(iii) A cheque for $1470, after deduction of a cash discount of

2%, was issued to a supplier on 20 March 2002. The
cashier recorded the gross amount in the cash book.

(iv) Other items shown on the bank statement, but not in the
cash book, included:

(1) A dishonoured cheque of $5200 from a

customer;

(2) Interest of $85 charged by the bank;

(3) An autopay item of $3015 for an electricity bill;

and

(4) A direct deposit of $10 946 lodged by a

customer.

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 Required:

(a) Show the necessary adjustments to be made in the cash

book on 31 March 2002. (8 marks)

(b) Prepare a bank reconciliation statement as at 31 March

2002, commencing with the adjusted cash book balance.
(3 marks)

(c) State the amount of the bank balance that should be

shown on the balance sheet of Don Limited at 31 March
2002.
(1 mark)

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3. The financial information of Grand View Limited for the year ended
31 December 2001 is presented below:

Profit and loss account for the year ended 31 December 2001
$ $
Cash sales 252 000
Credit sales 1 008 000
1 260 000
Less: Cost of sales
Opening stock 210 000
Purchases 955 500
1 165 500
Less: Closing stock 385 000 780 500
Gross profit 479 500
Less: Operating expenses 360 500
Net profit 119 000

Balance sheet as at 31 December 2001

Assets $
Office equipment 1 145 000
Furniture and fittings 381 000
Stock 385 000
Debtors 262 500
Bank 451 500
2 625 000

Liabilities and shareholders’ fund $

Creditors 420 000
Accruals 119 000
Ordinary share capital 1 925 000
Retained profits 161 000
2 625 000

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 Grand View Limited had also produced the following ratios for the year
2000.

Current ratio 1.93 : 1

Quick ratio 1.01 : 1
Stock turnover rate 3.02 times
Debtors’ collection period 3.26 months
Net profit ratio 10.07%
Return on capital employed 6.11%

Required:

(a) Compute the following ratios for the year 2001:

(i) Current ratio
(ii) Quick ratio
(iii) Stock turnover rate
(iv) Debtors’ collection period (in months)
(v) Net profit ratio
(vi) Return on capital employed
(Calculations to two decimal places)
(9 marks)

(b) Based on the ratios for the year 2000, comment briefly on the
liquidity and profitability of the company for the year 2001.
(5 marks)

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4. (A) State any two causes of depreciation. (3 marks)

(B) On 1 January 1998, Johnny Manufacturing Company purchased a

new machine for $262 500 and paid freight charges of $7500,
installation cost of $15 000 and annual maintenance fee of $1650.

The company estimated that the machine would have a useful life
of 8 years and a scrap value of $21 384. The financial year of the
company ends on 31 December.

Required:

(a) Calculate the cost of the machine to be capitalised by

Johnny Manufacturing Company. (2 marks)

(b) Calculate the annual depreciation on the machine for the

years 1998, 1999 and 2000 if the company adopted the
reducing balance method and a depreciation rate of 30%
per annum. (3 marks)

(c) Suppose the company decided to use the straight-line

method of depreciation.

(i) Calculate the annual depreciation on the

machine.
(2 marks)

(ii) Prepare the necessary journal entries to record

the disposal of the machine if it was sold for
$155 000 on 31 March 2002. (Narrations are not
required.) (4 marks)

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SECTION B

Answer any TWO questions from this section. Each question carries 29 marks.

5. (A) List six types of errors that do not affect the agreement of the debit
and credit totals of a trial balance. (3 marks)

(B) The trial balance of May Limited at 31 March 2002 did not agree
and a suspense account was debited with the difference. The draft
net profit for the year amounted to $67 246.

Subsequent checking of the records revealed the following:

(i) A credit purchase of furniture for $5000 had been

recorded in the purchases day book. The company
provides for depreciation at the rate of 25% on the cost of
furniture held at the end of each financial year.

(ii) The closing stock at 31 March 2002 was over-valued by

$1347.

(iii) Free samples received from the suppliers had been

wrongly recorded as credit purchases of $1000.

(iv) A partial loan repayment of $6000 had been recorded

correctly in the cash book. However, it was recorded as
$600 in the loan interest account.

(v) The sales day book was overcast by $1870.

(vi) Discounts allowed of $460 had been debited to sales as

$640.

(vii) An increase in the provision for doubtful debts of $900

had been treated as a bad debt on 31 March 2002.

(viii) A payment for telephone expenses of $540 had been

recorded twice in the insurance account.

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 Required:

(a) Prepare the necessary journal entries to correct the above.

(Narrations are not required.) (12 marks)

(b) Draw up the suspense account. (5 marks)

(c) Prepare a statement to correct the draft net profit for the year ended
31 March 2002. (9 marks)

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6. The trial balance of Star Limited at 31 March 2002 was as follows:

$ $
3 000 000 ordinary shares of $0.5 each, fully paid 1 500 000
8% loan (borrowed in 2000 and repayable in 750 000
2005)
Office equipment, at cost 3 000 000
Furniture and fittings, at cost 3 300 000
Provision for depreciation, 1 April 2001
Office equipment 625 000
Furniture and fittings 1 125 000
General reserve 105 000
Retained profits 310 912
Trade debtors 910 500
Trade creditors 574 908
Stock, 1 April 2001 42 650
Share premium 125 000
Provision for doubtful debts, 1 April 2001 19 865
Loan interest 30 000
Sales 6 062 500
Purchases 2 235 614
Sales returns 33 725
Carriage inwards 8 400
Wages and salaries 800 000
Rent and rates 768 450
Cash at bank 69 446
Interim dividend 60 000
Administration expenses 597 100
Selling and distribution expenses 442 300
Shares issue 1 100 000
12 298 185 12 298 185

Additional information:

(i) Stock as at 31 March 2002 amounted to $48 050.

(ii) The following adjustments were to be made on 31 March 2002:

$
Accrued wages and salaries 10 600
Prepaid rates 3 900

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 (iii) Trade debts amounting to $85 000 were to be written off and a
provision for doubtful debts was to be maintained at 3% of trade
debts.

(iv) A piece of fully depreciated office equipment costing $92 000 was
sold for $6000. The company only recorded the proceeds from the
sale in the bank account and the sales account.

(v) Depreciation was to be charged as follows:

Office equipment − 10% on cost

Furniture and fittings − 20% on net book value

(vi) In October 2001, 1 000 000 ordinary shares were offered to the
public at $1.10 per share. The company only debited the cash at
bank account and credited the shares issue account. The new
shares were also entitled to the final dividend proposed for the
year.

(vii) The board of directors proposed transferring $150 000 to the

general reserve and to declare a final dividend of $0.03 per share.

Required to prepare:

(a) the trading, profit and loss and appropriation accounts of Star
Limited for the year ended 31 March 2002, and (16 marks)

(b) the balance sheet of Star Limited as at the same date. (13 marks)

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7. Au, Fok and Mak were partners sharing profits and losses in the ratios of
2:1:2 respectively. The balance sheet of their business as at 30 April 2002
was as follows:

$ $ $
Fixed assets
Plant and machinery 272 250
Furniture 60 750
Motor vehicles 96 750
429 750
Current assets
Stock 108 000
Debtors 31 500
Bank 78 975
218 475
Less: Current liabilities
Loan – Fok 90 000
Creditors 72 000 162 000 56 475
486 225
Capital accounts
Au 195 750
Fok 117 000
Mak 144 000
456 750
Current accounts
Au 16 325
Fok 12 600
Mak 550 29 475
486 225

On 1 May 2002, the partners decided to dissolve the partnership on the

following terms:

(i) Au was made responsible for collecting the debts due to the firm.
He was entitled to a commission of 2% on all sums received.
Consequently, a cash discount of $1000 was allowed and debts
amounting to $3500 proved to be uncollectible.

(ii) Plant and machinery were sold at a price of 20% below book
value.

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 (iii) The furniture was taken over by Au and Fok at agreed values of
$29 000 and $20 000 respectively.

(iv) Mak took over the motor vehicles at only $10 000, but he was also
personally responsible for paying off 60% of the creditors.

(v) The remaining creditors were settled by the firm and a discount of
5% was received.

(vi) A customer bought the stock at a price of 75% of the book value.

(vii) Fok’s loan was repaid.

(viii) Realisation expenses amounted to $29 600.

Required to prepare:

(a) the realisation account; (14 marks)

(b) the bank account; and (7 marks)

(c) the partners’ capital accounts in columnar form, showing the final
settlement among them. (8 marks)

END OF PAPER

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