HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED

SECTION A
Answer any FOUR questions from this section. Each question carries 10 marks.

1. For each of the independent situations described below, list the accounting principle or concept
that has been violated and give your explanation. (10 marks)
i. Raymond Company has been adopting different methods to calculate depreciation on its
motor vehicles for the past 4 years.
ii. In estimating the provision for doubtful debts, the accountant of Peter Limited prefers to
have a provision that is slightly too small rather than slightly too large.
iii. The current liabilities of Reliable Store are much bigger than its current assets. In order
to present a better liquidity position, the owner decides to include his personal bank
account in the Store’s balance sheet.
iv. Luxury Hotel recognises hotel room rental income on the date that a reservation is
received. For the year 2001, many overseas visitors make reservations one year in
advance.

2. “Although the totals of debit and credit balances agree in a trial balance, it does not mean that
the books are correct as there are various situations that give rise to errors.”
Elaborate on the above statement with examples. (10 marks)

3. Mandy Limited has an authorised share capital consisting of 500000 ordinary shares of $2.50
each and 50000 8% preference shares of $10 each. An extract of the share capital and
reserves section of its balance sheet at 31 December 1999 is shown below:
$ $
Issued and fully paid share capital

19000 8% preference shares ?

? Ordinary shares 1000000
?
Reserves

Share premium 600000

Retained profits 720800 1320800
?
Additional information:
i. The shares were all issued on 1 January 1997 and the preference shares were issued at
par.
ii. There were no other transactions affecting the share capital and share premium accounts
after the first issue.
iii. The balance in retained profits at 1 January 1999 was $590000 and there were no
dividends in arrears. Net profit for the year was $250000.
Required to calculate:
a. the amount of authorised share capital. (1.5 marks)
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED

b. the amount of paid-up preference share capital. (1 mark)

c. the amount of issued share capital. (1 mark)
d. the number of ordinary shares issued. (1.5 marks)
e. the amount of dividend that should be paid annually to preference shareholders. (1 mark)
f. the average issue price of an ordinary share. (2 marks)
g. the amount of ordinary dividend declared during the year 1999.
(2 marks)

4. On 1 July 1999, Queen Limited, which prepares its accounts annually to 31 December, paid a
deposit of $2400 to Prince Limited to acquire a piece of equipment on hire purchase terms.
The cash price of the equipment was $31200. Queen Limited was required to pay, in addition to
the deposit, eight equal quarterly instalments of $4464 each, payable on the last days of
March, June, September and December. The instalments were calculated taking into account
interest at the rate of 12% per annum on the balance of the cash price outstanding on 1 July
1999. The first instalment was paid on 30 September 1999.
On 31 December 1999, after paying the December instalment and the outstanding cash price
balance, the company sold the equipment for $30000 cash.
Depreciation is to be charged on the equipment at the rate of 10% per annum on cost. Queen
Limited adopted the interest suspense account method in recording the hire purchase
transactions.
Required:
Prepare the following accounts in the books of Queen Limited to record the above transactions:
a. Prince Limited account. (4 marks)
b. interest suspense account. (3 marks)
c. disposal of equipment account. (3 marks)

5. Ben Lee is a wholesaler of carpets. On 1 January 2000, he had the following balances in his
books:
$
Trade debtors 42000

Bank 69300
Stock 84600
Trade creditors 79110
All purchases and sales were made on credit. During the three months to 31 March 2000, Ben
made a gross profit of 25% on all sales. The business banked all receipts from debtors
amounting to $995000 and paid the following out of the business bank account:
$
Operating expenses 160400

Trade creditors ?
On 31 March 2000, there was a burglary in the shop and all the stock was stolen. It was also
discovered that the cashier had misappropriated cash from the business bank account
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED

amounting to $10000.
In order to ascertain the amount of the stock loss, Ben identified the following balances on the
same day:
$
Trade debtors 73500

Bank 55650
Trade creditors 88900

Required:
a. Calculate the amount of sales for the three months to 31 March 2000. (2 marks)
b. Draw up the bank account for the period. (3 marks)
c. Calculate the amount of stock stolen. (5 marks)

6. Kenny made the following transactions:

1999
October 1 Drew a one-month bill on Chan for $4650 to settle a debt of $4690 owed
from him.
15 Drew a four-month bill on Lung for $7200.
20 Endorsed Chan’s bill of $4650 over to Au in part settlement of the amount
owed to him. Kenny also sent a cheque of $3350 to Au for the balance.
November 1 Chan’s bill was dishonoured. Kenny paid to Au the full amount of the bill
by cheque.
2 Chan paid $1650 by cheque and accepted a second bill for the remaining
balance plus interest at 6% per annum payable in two months.
December 15 Discounted the bill of $7200 from Lung t 8% per annum with the bank.
2000
January 2 Chan’s bill was honoured.
February 15 Lung’s bill was dishonoured and Kenny paid to the bank the amount of the
bill plus a noting charge of $200.
22 Lung settled the outstanding amount by cheque.

Required:
Prepare journal entries in Kenny’s books to record the above transactions. (Narrations are not
required.) (10 marks)

SECTION B
Answer any THREE questions from this section. Each question carries 20 marks.
7. The profit and loss account of Sunny Fashion for the year ended 31 December 1999 is shown
below:
$ $ $
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED
Sales 1125000

Less: Sales returns 45000

1080000
Cost of goods sold
Opening stock ?
Purchases ?
Less: Purchases returns 28000 ?
?
Less: Closing stock ? 648000
Gross profit 432000
Less: Rent and rates 185500
Salaries 120000
Selling expenses 18000
Depreciation of fixed assets 6500
Sundry expenses 6000 336000
Net profit 96000
Additional information:
i. The closing stock and the opening stock amounted to the same figure.
ii. The stock turnover rate was 8 times.
iii. Debtors’ collection period for the year was two months and creditors’ repayment period
was three months.
iv. Sales and purchases accrued evenly throughout the year.
v. All purchases and 90% of the net sales were on credit.
vi. The current ratio was 2:1:1.
vii. Current assets consisted of cash at bank, debtors, stock and prepayments.
viii. Cash at bank amounted to 40% of working capital.
ix. The fixed assets had a cost of $339800 and a provision for depreciation of $191500 at 1
January 1999. There were no additions and disposals of fixed assets during the year.
x. The return based on the owner’s capital at 31 December 1999 was 30%.
xi. Drawings during the year amounted to $36000.
Required:
a. Calculate the amounts for closing stock and gross purchases. (4 marks)
b. Prepare the balance sheet of Sunny Fashion as at 31 December 1999. (12 marks)
c. Briefly comment on the liquidity and profitability of Sunny Fashion for 1999 if the company
had the following figures in 1998:
Current ratio 1:6:1
Stock turnover rate 9 times
Debtors’ collection period 2.5 months
Return on owner’s capital 45%

(4 marks)

8. The following trial balance was extracted from the books of Moon Limited at 31 March 2000:
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED
$ $
1200000 ordinary shares of $0.50 each, fully paid 600000

Furniture and fittings, at cost 1500000

Motor vehicles, at cost 500000
Provision for depreciation, 1 April 1999
Furniture and fittings 427000
Motor vehicles 118000
Retained profits 93600
General reserve 67000
Trade debtors 364600
Trade creditors 241200
Stock, 1 April 1999 26410
10% loan (borrowed in 1998 and repayable in 2002) 200000
Cash at bank 333290
Share premium 401000
Provision for doubtful debts, 1 April 1999 5400
Sales 2954300
Purchases 1716600
Loan interest 15000
Carriages inwards 6000
Sales returns 20000
Purchases returns 9000
Administration expenses 409150
Selling and distribution expenses 205450
Interim ordinary dividend 20000
5116500 5116500
Additional information:
i. Depreciation was to be charged as follows:
Furniture and fittings – 10% on net book value
Motor vehicles – 20% on cost

ii. Stock as at 31 March 2000 amounted to $28500.

iii. The following adjustments were to be made on 31 March 2000:
$
Accrued carriage inwards 400

Prepaid administration expenses 9600

iv. An amount of $2200 owing from a customer was to be settled by contra with his
account as a supplier.
Trade debtors amounting to $4000 were to be written off and a provision for doubtful
debts was to be maintained at 3% of trade debtors.
v. Directors’ fees of $35000 were to be provided for.
vi. The directors resolved to transfer $85000 to the general reserve and to propose a final
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED

ordinary dividend of $0.50 per share.

vii. On 1 April 1999, $300000 9% debentures were issued at 98. The company debited the
bank account and credited the share premium account in respect of this issue. Discount
on debentures was to be written off against the share premium account evenly over
three years. No debenture interest has yet been paid.
Required:
a. Prepare the trading, profit and loss and appropriation account of Moon Limited for the year
ended 31 March 2000. (10 marks)
b. The balance sheet of Moon Limited as at the same date. (10 marks)
9. Chau, Lok and Yeung were partners sharing profits and losses in the ratio of 3:2:1 respectively.
They decided to dissolve their partnership on 30 April 2000.
At the date of dissolution, their draft balance sheet was as follows:
$ $
Fixed Assets

Office premises 542250

Motor vehicles 198225
740475
Goodwill 146000
Current Assets
Stock 61575
Debtors 67800
Bank 9525
138900
Less: Current Liabilities
Creditors 137600 1300
887775
Capital Accounts:
Chau 157105
Lok 700670
Yeung 30000
887775
It was agreed that the partnership be dissolved on the following terms:
i. Goodwill was to be written off.
ii. The motor vehicles were taken over by the partners at agreed values as Chau $60000
and Lok $72000.
iii. The office premises were sold at a profit of $60600.
iv. Paying by personal cheque, Chau took over at book value stock amounting to $20000.
The remaining stock was sold for 80% of the book value.
v. The debtors were realised at $54240.
vi. Lok was to take over the creditors at book value. A discount of 5% was allowed to him
by the creditors on settlement.
HCKEE-PRINCIPLES OF ACCOUNTS-2000 ALL RIGHTS RESERVED

vii. Realisation expenses amounted to $36500.

viii. Since Yeung was insolvent, he was only required to contribute $1000 towards the
partnership. His deficiency was to be borne by the other partners in their profit and loss
sharing ratio.
Required to prepare:
a. the realisation account. (8 marks)
b. the bank account. (5 marks)
c. the partners’ capital accounts in columnar form, including the final settlement among them.
(7 marks)

10. The trial balance of Classics Limited at 31 March 2000 did not agree and a suspense account
was debited with a difference of $1260. The draft net profit for the year amounted to $39426.
Subsequent checking of the records revealed the following:
i. A payment of $2600 to Tony Company had been posted to the personal account as
$260.
ii. A petty cash balance of $400 had been omitted from the trial balance.
iii. Wages amounting to $1200 for the installation of office equipment had been recorded in
the wages account.
iv. Cash sales of $2000 had been correctly entered in the cash book, but the sales account
was credited with $2020.
v. A provision for doubtful debts of $2900, which amounted to 2% of debtors at year end,
was made. However, a provision of 2.5% should have been provided.
vi. Goods with a list price of $5000 were purchased and a 10% trade discount was given by
Overseas Ltd. The company was also granted a cash discount of 7% for early
settlement of the debt. The amount of $5000 was recorded both at the time of
purchase and at the time of payment to Overseas Ltd.
vii. The company has entered into a joint venture with Modern Limited since 1998. The
company recorded the reimbursement of transportation expenses of $1000 to a
customer of the joint venture as a motor vehicle expense of the company.
viii. A purchase of goods amounting to $1500 from the joint venture had only been recorded
in the purchases account.
Required:
a. Prepare journal entries to correct the above. (Narrations are not required.) (12 marks)
b. Draw up the suspense account. (4 marks)
c. Prepare a statement to correct the draft net profit for the year ended 31 March 2000. (4
marks)

END OF PAPER