Cambridge International Examinations

Cambridge Ordinary Level

* 7 5 8 7 2 4 2 0 4 4 *

PRINCIPLES OF ACCOUNTS 7110/21

Paper 2 October/November 2018
2 hours
Candidates answer on the Question Paper.
No Additional Materials are required.

READ THESE INSTRUCTIONS FIRST

Write your Centre number, candidate number and name on all the work you hand in.
Write in dark blue or black pen.
You may use an HB pencil for any diagrams or graphs.
Do not use staples, paper clips, glue or correction fluid.
DO NOT WRITE IN ANY BARCODES.

Answer all questions.

You may use a calculator.

Where layouts are to be completed, you may not need all the lines for your answer.
The businesses mentioned in this Question Paper are fictitious.

At the end of the examination, fasten all your work securely together.
The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 20 printed pages.

DC (SCD (JB)) 149834/2

© UCLES 2018 [Turn over
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1 Lohit is a supplier of goods to Asanka. The following entries require recording in the books of
Asanka for the month of August 2018.

August 1 Asanka owed Lohit, $90

9 Lohit supplied goods to Asanka, list price $80 less 15% discount

10 Asanka returned goods, list price $20, supplied on 9 August

15 Asanka paid $97 by cheque after deducting $3 discount

REQUIRED

(a) Prepare the account of Lohit in the books of Asanka for August 2018. Balance the account
and bring down the balance on 1 September 2018.

Lohit account

Date Details $ Date Details $

[5]

(b) Name each of the following:

(i) type of discount allowed by Lohit on 9 August

.......................................................................................................................................[1]

(ii) book of prime entry in which Lohit would record the transaction on 9 August

.......................................................................................................................................[1]

(iii) document that Lohit would send to Asanka recording the transaction on 10 August

.......................................................................................................................................[1]

(iv) sub-division of Lohit’s ledger which would contain the account of Asanka

.......................................................................................................................................[1]

(v) section of Lohit’s statement of financial position which would contain the balance on
Asanka’s account.

.......................................................................................................................................[1]
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The following were recorded in the books of Asanka in the year ended 31 August 2018.

Balance Cash book entries for Balance

1 September 2017 the year ended 1 September 2018
31 August 2018
$ $ $
Rent payable 150 Debit 14 000 Paid 250 Debit
Telephone expenses 60 Debit 1 500 Paid 25 Credit
Rent receivable 200 Credit 1 800 Received 500 Debit

REQUIRED

(c) Explain the meaning of the:

(i) $150 debit balance on the rent payable account on 1 September 2017;

...........................................................................................................................................

.......................................................................................................................................[2]

(ii) $25 credit balance on the telephone expenses account on 1 September 2018.

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.......................................................................................................................................[2]

(d) Complete the following table by inserting the values of rent payable, telephone expenses and
rent receivable which would appear in the trial balance, income statement and statement of
financial position.
The first one has been completed as an example.

Trial Income statement for the Statement of financial

balance at year ended 31 August 2018 position at 31 August 2018
31 August
2018 Expenses Income Assets Liabilities

$ $ $ $ $
Rent payable 14 150 13 900 – 250 –
Telephone
expenses
Rent receivable
[6]

[Total: 20]

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2 Arjit provided the following information for the month of July 2018.

1 Sales ledger control account balances 1 July 2018

$
Debit 4230
Credit 80

2 Transactions for the month ended 31 July 2018

$
Credit sales 9200
Cash sales 3100
Bad debts written off 450
Discount allowed 230
Returns inwards 740
Receipts from credit customers 8000
Refund to credit customer by cheque 300
Interest charged on overdue account 180

3 Sales ledger control account balances 1 August 2018

$
Debit ?
Credit 150

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REQUIRED

(a) Prepare the sales ledger control account for the month of July 2018. Balance the account and
bring down the balances on 1 August 2018.

Sales ledger control account

Date Details $ Date Details $

[9]

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(b) State one possible reason for the credit balance on the sales ledger control account.

...............................................................................................................................................[1]

Arjit prepared a trial balance on 31 July 2018. The totals of the trial balance did not agree. He
opened a suspense account.

On inspecting his books Arjit found the following errors.

1 A purchase of goods from Dipu had been correctly recorded in the purchases journal as $65.
An entry of $45 had been made in the account of Dipu.

2 A cheque received from Arca, $240, had been recorded in Arca’s account as $420.

3 The total of the discount allowed column in the cash book, $15, had been credited to the
discount allowed account.

REQUIRED

(c) Prepare the journal entries to correct the errors 1 to 3. Narratives are not required.

General Journal

Debit Credit

$ $

[6]

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(d) Prepare the suspense account showing the original difference in the books.

Suspense account

Date Details $ Date Details $

[4]

[Total: 20]

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3 The following information is available for B Limited at 31 August 2018.

B Limited
Statement of Changes in Equity for the year ended 31 August 2018

Ordinary General Retained Total

Shares Reserve Earnings

$ $ $ $
Balance at 1 September 2017 150 000 65 000 85 000 300 000
Profit for the year 75 000 75 000
Transfer to general reserve 25 000 (25 000) –
Dividend paid (ordinary shares) (21 000) (21 000)
Balance at 31 August 2018 150 000 90 000 114 000 354 000

Other balances at 31 August 2018

$
Trade payables 73 000
6% Debentures (repayable 2024) 50 000
Debenture interest owing 4 800
General expenses owing 5 300
5% Bank loan (repayable 31 May 2019) 40 000

Additional information

B Limited had issued 300 000 ordinary shares.

REQUIRED

(a) Explain why the debentures are not included in the statement of changes in equity.

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(b) Calculate the dividend paid on ordinary shares for the year (in $ per ordinary share).

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...............................................................................................................................................[2]

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(c) Prepare an extract from the statement of financial position showing the equity and liabilities at
31 August 2018.

B Limited
Extract from the Statement of Financial Position at 31 August 2018

...................................................................................................................................................

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(d) Suggest two possible reasons why the directors of B Limited transferred $25 000 to the
general reserve.

1 .................................................................................................................................................

...................................................................................................................................................

2 .................................................................................................................................................

...............................................................................................................................................[2]

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(e) Explain two differences between ordinary shares and preference shares.

1 .................................................................................................................................................

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2 .................................................................................................................................................

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(f) Distinguish between cumulative preference shares and non-cumulative preference shares.

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(g) Complete the following table by placing a tick (✓) in the correct column to indicate where
each item would appear in the financial statements.
The first one has been completed as an example.

Income Statement of Statement

statement changes in of financial
equity position

Ordinary share dividend paid ✓

Director’s salary

Other receivables
[2]

[Total: 20]

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4 The following information was available from the books of Linrae.

Totals for the year ended 30 September 2017

$
Revenue 240 000
Cost of sales 180 000
Expenses (excluding depreciation) 35 000
Depreciation 10 000

Balance at 30 September 2017

Linrae’s capital 100 000

REQUIRED

(a) Calculate the following for the year ended 30 September 2017. Show your answers to two
decimal places.

Workings Answer

Percentage mark-up

Percentage profit for the

year to revenue (profit
margin)

Return on capital employed

(ROCE)

[6]

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On 1 October 2017 Linrae took a 10% bank loan for $50 000 to expand her business. The loan is
repayable in 5 years.

At the end of the year’s trading on 30 September 2018 the following information was available.

1 Revenue for the year was $308 000.

2 The mark-up for the year was 40%.

3 Expenses for the year (excluding bank loan interest and depreciation) had increased by
$4000.

4 The bank loan interest had not been paid.

5 Depreciation for the year had increased by 20%.

6 Linrae’s capital at 30 September 2018 was $110 000.

REQUIRED

(b) Prepare the income statement for the year ended 30 September 2018.

Linrae
Income Statement for the year ended 30 September 2018

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(c) Explain why Linrae’s capital had increased over the year even though she had not introduced
any additional capital.

...................................................................................................................................................

...................................................................................................................................................

...............................................................................................................................................[2]
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(d) Calculate the following for the year ended 30 September 2018. Show your answers to two
decimal places.

Workings Answer

Percentage profit for the

year to revenue (profit
margin)

Return on capital employed

(ROCE)

[4]

(e) Analyse the profitability of Linrae’s business for the two years ended 30 September 2017 and
30 September 2018.

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...............................................................................................................................................[4]

[Total: 20]

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5 Aung and Khin are in partnership. The partnership agreement states that they share profits and
losses in the ratio 3:2 respectively.

Interest is charged on drawings (excluding partnership salary) at the rate of 5%. A salary of $9000
per annum is paid to Khin.

The following balances were extracted from the books on 30 September 2018.

$
Capital accounts
Aung 50 000
Khin 50 000
Current accounts at 1 October 2017
Aung 3 000 Debit
Khin 6 000 Credit
Drawings
Aung 9 000
Khin 14 000
Land and buildings (at cost) 140 000
Motor vehicles (at cost) 42 000
Office equipment (at cost) 64 000
Provisions for depreciation at 1 October 2017
Land and buildings 29 600
Motor vehicles 10 000
Office equipment 46 000
Provision for doubtful debts 500
8% Bank loan (repayable 31 March 2020) 60 000
Bank interest paid 3 600
Bank 5 200 Debit
Revenue 309 000
Purchases 174 000
Returns inwards 9 100
Trade payables 45 200
Trade receivables 31 000
Inventory at 1 October 2017 19 700
Marketing expenses 25 000
Other operating expenses 17 250
Wages and salaries 40 500
Motor vehicle expenses 9 200
Commission receivable 12 250
Rent paid 12 000

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Additional information at 30 September 2018

1 Inventory was valued at $36 000.

2 Marketing expenses prepaid were $4000.

3 Commission receivable of $1750 was due.

4 Depreciation is to be charged on all non-current assets as follows:

(i) Buildings at the rate of 4% per annum on cost. The land cost $80 000 and is not
depreciated.

(ii) Motor vehicles at the rate of 25% per annum using the diminishing (reducing) balance
method

(iii) Office equipment at the rate of 10% per annum on cost.

5 The salary of Khin was paid and recorded in the wages and salaries account.

6 A payment of $6800 made by cheque to a trade supplier, had not been recorded in the books.

7 Trade receivables of $5000 were irrecoverable. The provision for doubtful debts is to be
maintained at 5%.

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REQUIRED

(a) Prepare the income statement and appropriation account of Aung and Khin for the year ended
30 September 2018.

Aung and Khin

Income Statement and Appropriation Account for the year ended 30 September 2018.
$ $

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$ $

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[20]

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(b) Prepare the current accounts for the year ended 30 September 2018. Balance the accounts
and bring down the balances on 1 October 2018.

Current accounts

Date Details Aung Khin Date Details Aung Khin

$ $ $ $

[5]

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(c) Prepare the statement of financial position of Aung and Khin at 30 September 2018.

Aung and Khin

Statement of Financial Position at 30 September 2018

$ $ $

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$ $ $

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[15]

[Total: 40]

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reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the
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the live examination series.

Cambridge International Examinations is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of University of Cambridge Local
Examinations Syndicate (UCLES), which is itself a department of the University of Cambridge.

© UCLES 2018 7110/21/O/N/18