HONG KONG ASSOCIATION FOR BUSINESS EDUCATION

HONG KONG DIPLOMA OF SECONDARY EDUCATION

EXAMINATION 2014/15

BUSINESS, ACCOUNTING AND FINANCIAL STUDIES

MOCK EXAMINATION

PAPER 2A
ACCOUNTING MODULE

Time allowed: 2 hours 15 minutes

This paper must be answered in English

INSTRUCTIONS:

1. There are three sections in this paper: Section A (24 marks), Section B (36 marks) and
Section C (20 marks).

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

3. Show all your workings.

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Paper 2A – Accounting Module BAFS Mock Examination 2014/15

SECTION A
Answer ALL questions in this section.

Question 1
Dr. Frost, an alchemist, has invented a low calorie ice cream product to be launched in the coming
summer. Budgeted costs are as follows:

Spring Summer Autumn Winter

Activity level 500 units 1,000 units 700 units 200 units

Cost items $ $ $ $
Direct materials 600 1,200 840 240
Direct labour 1,000 2,000 1,400 400
Quality assurance 300 300 300 300
Equipment hire 700 1,000 1,000 700
Natural gas 600 1,000 760 360

The new ice cream product could be sold at $12 per unit.

REQUIRED:

(a) Classify each of the cost items listed above according to its cost behavior and the first one has
been done for you. (2 marks)
(i) Direct materials – variable cost
(ii) Direct labour –
(iii) Quality assurance –
(iv) Equipment hire –
(v) Natural gas –

(b) Dr. Frost is worrying about the sales volume in winter and you are asked to advise her the
margin of safety for her final decision. Calculate the margin of safety of the product in
quantity for the winter quarter. (4 marks)

(Total: 6 marks)

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Question 2
Aiden Wong is a trained engineer who started his business selling self-baked cake on 1 October
2013. Along with the growth in sales, he decided to make his own oven to increase the capacity of
daily cake production. Expenses incurred in making the oven were as follows:

Cost items $
Hardware materials 4,500
Electronic components 3,000
License fee for running business electronic machine per annum 1,000
Freight for moving the oven to from workshop to the shop 800
Installation cost 500
Electricity for running the machine 4,000

The oven started producing cake on 1 January 2014. Aiden Wong would like to write off the cost of
the oven over its useful life of ten years and there is an expected scrap value of $400 at the end of
its useful life.

REQUIRED:

(a) Calculate the overall capital expenditure of the oven made and name the revenue
expenditure(s) involved in running the oven. (3 marks)

(b) Prepare the accumulated depreciation for the oven for the year ended 30 September 2014.
(3 marks)
(Total: 6 marks)
Question 3
Lut Lut Company runs two departments including the machining department to produce wire used
in the finishing department which wraps the wire with padded fabric to form clothes hangers. The
total costs for producing 100,000 clothes hangers per month are as follows:

Cost items $
Materials 86,400
Wages 44,300
Management salaries 8,500
Carriage outwards 3,900
Rent and Rates 13,500
Depreciation, insurance and maintenance 17,800

A supplier of wire offers to provide the wire needed for the making of clothes hangers at $0.5 each
and as a result, the machining department could be shut down. The facility of the machining
department could then be rented out at $30,000 per month. There would also be a reduction of the
cost of materials by $40,000 and labour cost by $20,000 per month respectively. The management
salaries would, however, be increased by $5,000 per month, to cope with the inspection of buy-in
wire.

REQUIRED:
You are asked to determine whether the company should accept the offer to buy-in wire or to
produce the clothes hanger required per month. (Total: 6 marks)

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Question 4
On 31 March 2014, the bank statement of Zoe showed a debit balance of $34,554 and the cash book
showed a credit balance of $32,222 on its account at the bank. In reconciling the bank statement
with the book balance, the following items were discovered:

(i) The bank had wrongly debited Zoe’s account with a bank charge of $988, which should
have been debited to another client.

(ii) A cheque from debtors had been recorded twice in the cash book.

(iii) Cheques issued amounting to $8,445 had not been presented to the bank for payment.

(iv) The credit side of cash book had been overcast by $1,200.

(v) Lodgments totaling $2,391 for March were not credited by the bank until 3 April 2014.

(vi) The following items were shown on the bank statement but not in the cash book:

(1) A direct deposit of $3,211 by a customer.

(2) Interest income on debenture of $1,500.

(3) Dishonoured cheques from Johnny Limited in the amount of $555.

REQUIRED:

(a) Show the necessary adjustment to be made in the cash book on 31 March 2014.
(3.5 marks)

(b) Prepare a bank reconciliation statement as at 31 March 2014, commencing with the bank

statement balance. (2.5 marks)

(Total: 6 marks)

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SECTION B
Answer ALL questions in this section.

Question 5
Tobias inherited from his deceased uncle forty boxes of wine valued at $10,000 on 1 January 2013.
Having sought a reliable supply of further stock, he opened a small wine selling counter at a large
shopping mall in a busy area of the city.

To start the business, Tobias drew $20,000 from his own bank account to finance the business. As
he is not quite financially well equipped, he runs the business with very strict rules. Some of his
rules are listed below:

(i) Gross profit margin is fixed at 75% and Net Profit to Sales is maintained at 30%.

(ii) The inventory turnover rate is maintained at 8 times a year.

(iii) Average collection period and average payment period are set at 1 month and 3 months
respectively.

(iv) Current ratio is always kept at 2 to 1 in order to build up a good liquidity position.

(v) Closing inventory at 31 December 2013 was $8,000.

The set rules were followed throughout the year with no exception and Tobias is expecting a yearly
financial report which shows the financial performance of the company in the year ended
31 December 2013.

REQUIRED:

(a) Prepare the income statement for the year ended 31 December 2013. (5 marks)

(b) Prepare the statement of financial position as at 31 December 2013. (5 marks)

(Total: 10 marks)

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Question 6
The following information is available for a firm producing and selling a single product:

Budgeted costs (at normal level activity of 240,000 unit) $

Direct material and labour 264,000
Variable production overhead 48,000
Fixed production overhead 144,000
Variable selling and administration overhead 24,000
Fixed selling and administration overhead 96,000
576,000

The overhead absorption rates are based upon normal level activity per period. During the period
just ended, 260,000 units of product were produced and 230,000 units were sold at $3 per unit. At
the beginning of the period 40,000 units were in stock. They were valued at the budgeted costs as
shown above. Actual costs incurred were as per budget.

REQUIRED:

(a) Prepare the absorption costing and marginal costing statement for the period. (8 marks)

(b) Reconcile the profit figure between absorption costing and marginal costing. (2 marks)

(c) State the situation in which the profit figures calculated under both absorption costing and

marginal costing would be the same. (2 marks)

(Total: 12 marks)

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Question 7
On 30 September 2014, the following trial balance was extracted from books of Line Walker Ltd:
Dr Cr
$ $
240,000 ordinary shares of $0.5 each 120,000
General reserve 40,000
Retained profits 16,000
6% preference shares of $1 each 60,000
Share premium 58,000
Equipment at net book value, 1 October 2013 (cost $95,000) 48,750
Inventory as at 1 October 2013 82,772
Accounts receivable 394,380
Accounts payable 42,700
Bank overdraft 13,328
Sales 432,116
Purchases 112,400
Carriage inwards 8,600
Operating expenses 125,392
Interim ordinary dividend 8,050
Interim preference dividend 1,800
782,144 782,144
Additional information:

(i) On 30 September 2014, the inventory had a cost of $52,310 and a net realizable value of
$51,120.

(ii) Some equipment, which acquired on 1 October 2011, costing $10,000 was sold for $5,000
at 1 October 2013. The company had recorded the disposal as cash sales.

(iii) Depreciation of equipment was to be provided at 10% on net book value.

(iv) On 20 September 2014, 100,000 ordinary shares were issued at $2.5 per share.
Applications had been received for 120,000 shares. Excess applications were refunded to
unsuccessful applicants on 4 October 2014. No entries had been made for the above issue.

(v) The board of directors proposed a transfer of $20,000 to the general reserve.

(vi) A final ordinary share dividend of $0.1 per share was proposed. The new shares were not
entitled to the final dividend proposed for the year.

REQUIRED:
(a) Prepare the journal entries to record the issue of ordinary shares. (2 marks)
(b) Prepare an income statement for the year ended 30 September 2014 and a statement of financial
position as at 30 September 2014. (12 marks)
(Total: 14 marks)

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SECTION C
Answer ONE question in this section.

Question 8
Winston and Nancy were in partnership, sharing profit and loss in the ratio 1:1. Interest was
charged on drawings at 5% per annum, and interest was credit on capital at 6% per annum. On
31 December 2012, the trial balance of the partnership was as follows:

$ $
Premise 100,000
Machinery 140,000
Goodwill 10,000
Inventory as at 31 December 2012 80,000
Trades receivable 15,000
Trades payable 28,000
Bank overdraft 17,000
Capital ~ Winston 200,000
Capital ~ Nancy 100,000
345,000 345,000

The partners had realized that their capital account balances do not reflect the following matters:
(i) Interest had not been charged on the following drawings:
Date of drawings Winston Nancy
$ $
1 June 2012 10,080
1 December 2012 15,360

(ii) Interest on partner’s capital at 6% per annum has not been credited.

REQUIRED:
(a) Prepare the capital accounts in column form, showing in detail all the necessary adjustments,
and the revised balances as at 31 December 2012. (4 marks)

On 1 January 2013, they had a new partner, Chris, and the following adjustments were made:
(i) Chris introduced a capital of $70,000 comprising an inventory of $20,000, machinery of
$15,000 and the balance in cash was paid into the partnership bank account on his admission
date.
(ii) Assets were revalued as follows: Premise $230,000; Machinery $180,000 and inventory
$75,000.

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(iii) Goodwill was valued at $90,000. No goodwill account was to remain in the books.
(iv) Winston, Nancy and Chris were to share profits and losses in the ratio of 2:2:1.
(v) No interest on drawings or interest on capital is allowed for the new partnership.

REQUIRED:
(b) Prepare the capital accounts of Winston, Nancy and Chris in columnar form to record the
admission of Chris. (5 marks)

During the year ended 31 December 2013, the partnership made a net loss of $150,000 before
appropriations. The following balances were extracted from books as at 31 December 2013:
$
Premise 200,000
Machinery 165,000
Inventory 60,000
Trades receivable 40,000
Trades payable 50,000
Bank overdraft 40,000

On 31 December 2013, Chris declared bankrupt and the partnership was dissolved as follows:

(i) The premise was sold for $110,000. Inventory was sold for $35,000.
(ii) Nancy took over the machinery at $100,000 and paid the realization expense of $3,400 on the
behalf of the partnership.
(iii) All debtors settled their accounts and a bad debt of $7,600 was recorded.
(iv) The creditors were settled by cash and 10% discount was received.
(v) The deficiency in Chris’s account was to be shared by Winston and Nancy in their profit and
loss sharing ratio.

REQUIRED:

Prepare:
(c) Realization account; and (6 marks)
(d) The capital account of Winston, Nancy and Chris in columnar form for the year ended
31 December 2013 including the final distribution to partners upon dissolution.
(5 marks)
(Total: 20 marks)

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Question 9
Jenny Lau is a Taiwanese who started her business selling snacks of various sorts from Taiwan.
She imports food items from different parts of Taiwan and distributes to food retailers focusing on
healthy diet. Business grows steadily and Jenny is considering further expansion.

News from Taiwan state that many food products were found contaminated with gutter oil, causing
Jenny to fear that loyal customers looking for healthy products might not consume her products.

Jenny formulated a contingency plan on her own with five major measures to regain customers’
confidence towards their products. Major decisions made are summed up as follows:

1. The company bought a set of testing instrument at $50,000 to conduct random checking so as
to detect product faults before the food items reach customers. The instrument could be used
for 5 years and there would be no scrap value at the end of its useful life. However, as there
would probably be no need for continuous testing after the crisis, Jenny paid the cost of the
instrument from her personal bank account and made no accounting records for this
transaction.

2. A press advertisement was placed on major magazines for healthy products in Hong Kong
telling customers that their products were carefully selected from reliable suppliers and extra
testing procedures were launched to safeguard the interests of customers. The cost of the
advertisement was $50,000 and a quarter of it was unpaid pending for receipt of the last issue
in the year. Jenny considered that the advertisement made would help improve the image of
their products and such effect was long lasting. Jenny proposed to amortize the $50,000 over
5 years.

3. In order to further enhance customers’ confidence towards the products of the business, Jenny
introduced a full refund guarantee scheme this year. Customers would get a full refund by
returning the unpacked products to the head office of the business and it was expected that
10% of sales would be returned for refund. Sales of the year amounted $2,500,000 and
$1,000,000 of which was sold with the full refund guarantee. Jenny recorded no provision for
the refund within the product return period that would expire after the year end date.

4. To improve the operating performance, Jenny persuaded a few retailers to make advance order
for the supply of products in the coming financial year by offering a better trade discount.
Two retailers made an advance order amounted $500,000 by paying a deposit of 10% and
goods were to be delivered early next financial year. Jenny proposed to include the advance
order into the credit sales of the year.

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5. To further improve the profit figure of the year, Jenny decided to use the cost price to value the
closing inventory instead of the rule of the lower of cost and net realizable value used for years.
The cost of the closing inventory ascertained at the end of the year was $25,000 but it could be
sold only at $18,000 after paying a testing fee of $3,000. Jenny proposed to value the closing
inventory at $25,000.

REQUIRED
(a) Advise Jenny the correct journal entries at the end of the financial year to each of the five
measures mentioned above. (12.5 marks)

(b) For each of the case listed above, name one accounting concept and briefly explain the
underlying accounting treatment you have suggested in part (a) above. (7.5 marks)
(Total: 20 marks)

END OF PAPER

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