Book-keeping & Accounts

Level 2

Model Answers
Series 3 2007 (Code 2506) Hong Kong

1 2506/2/06

ASE 2006 2 06 2 >f0t@W9W2`Bk5eBkTUBX#

Book - Keeping & Accounts Level 2 Hong Kong

Series 3 2007

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QUESTION 1 Johnny Choo, a Hong Kong furniture manufacturer, has a branch in Singapore. It is company policy that all branch sales are on credit and all cash received at the branch is remitted to the head office. All purchases are made by the Hong Kong office, with goods sent to the branch being invoiced at cost plus 25%. Branch transactions are recorded in the head office books. For the year ended 31December 2006, the following information was entered in the head office books: Goods invoiced to branch 900,000 Goods returned by branch to head office 18,000 Branch sales 925,800 Goods returned by customers to branch 9,130 Payments by branch debtors to branch 920,100 Discounts allowed to branch debtors 24,780 The following balances appeared in the books at 1 January 2006 Branch debtors Branch stock at selling price Branch adjustment account Balance at 31 December 2006 branch stock at selling price REQUIRED Prepare the following accounts relating to the Singapore branch in the head office books for the year ended 31 December 2006. Memorandum columns are not required. (a) (b) (c) (d) Branch Stock Goods to Branch Branch Adjustment Branch Debtors 75,600 88,200 17,640 49,500

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MODEL ANSWER TO QUESTION 1 (a) 2006 Jan 1 Dec 31 Dec 31 Dec 31 Balance b/d Goods to branch Branch adjustment Branch debtors/Sales/Returns Branch Stock 2006 88,200 Dec 31 720,000 Dec 31 180,000 Dec 31 9,130 Dec 31

Dec 31 997,330 2007 Jan 1 (b) 2006 Dec 31 Dec 31 Branch stock/Returns Trading a/c/P&L Balance b/d 49,500

Branch debtors/Sales Goods to branch/Returns Branch adjustment Stock loss: Branch adjustment Branch p&l Balance c/d

925,800 14,400 3,600 806 3,224 49,500 997,330

Goods to Branch 2006 14,400 Dec 31 Branch Stock/Goods 705,600 No aliens 720,000 Branch Adjustment 2006 3,600 Jan 1 806 Dec 31 183,334 9,900 197,640 2007 Jan 1

720,000 720,000

(c) 2006 Dec 31 Dec 31 Dec 31 Dec 31 Branch Stock/Returns Branch Stock P&L Balance c/d

Balance b/d Branch Stock/Goods No aliens

17,640 180,000

197,640 Balance b/d 9,900

[1] 925,800 - 9,130 = 916,670 @ 20% margin = 183,334 (d) 2006 Jan 1 Dec 31 Branch Debtors 2006 75,600 Dec 31 925,800 Dec 31 Dec 31 Dec 31 1,001,400 47,390

Balance b/d Branch Stock/Sales

Cash/Bank Discounts allowed Branch Stock/Returns Balance c/d

920,100 24,780 9,130 47,390 1,001,400

2007 Jan 1

Balance b/d

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QUESTION 2 Sally Wong, whose financial year ends at 31 December, summarised the following information in regard to her last three years of trading: 2004 Debtors balances at 31 December prior to preparation of the final accounts Bad debts: Written off during the year To be written off at 31 December Doubtful debts: Specific provision required at 31 December General provision at 31 December to be adjusted to 140,000 2005 160,000 2006 130,000

800 300

1,500 1,000

1,200 700

1,200 3%

800 2%

600 4%

At 1 January 2004, the balance on the provision for doubtful debts account was 1,300. REQUIRED (a) Prepare ledger accounts for each of the years 2004, 2005 and 2006 for: (i) (ii) (b) (c) Bad debts Provision for doubtful debts

Show how debtors would appear in the Balance Sheet at 31 December 2006. Define the following terms: (i) Bad debts (ii) Provision for doubtful debts

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MODEL ANSWER TO QUESTION 2 (a) (i) 2004 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors Bad Debts 2004 800 Dec 31 300 1,100 2005 Dec 31

Profit & Loss A/c

1,100 1,100

2005 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors

1,500 1,000 2,500

Profit & Loss A/c

2,500 2,500

2006 Jan 1 - Dec 31 Debtors/Balance b/d Dec 31 Debtors

1,200 700 1,900

2006 Dec 31

Profit & Loss A/c

1,900 1,900

(a) (ii) 2004 Dec 31 Balance c/d

Provision for Doubtful Debts 2004 5,355 Jan 1 Balance b/d Dec 31 Profit & Loss A/c 5,355 3,964 1,391 5,355 5,748 5,748 2007 Jan 1 2005 Jan 1

1,300 4,055 5,355 5,355 5,355

2005 Dec 31 Dec 31

Balance c/d Profit & Loss A/c

Balance b/d

2006 Dec 31

Balance c/d

2006 Jan 1 Dec 31

Balance b/d Profit & Loss A/c

3,964 1,784 5,748

Balance b/d

5,748

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CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 2 CONTINUED Workings [1] Specific provision required General provision required: 3% x [140,000 (300 + 1,200)] Provision b/d Increase/(decrease) in provision [2] Specific provision required General provision required: 2% x [160,000 (1,000 + 800)] Provision b/d Increase/(decrease) in provision [3] Specific provision required General provision required: 4% x [130,000 (700 + 600)] Provision b/d Increase/(decrease) in provision (b) 1,200 4,155 5,355 1,300 4,055 800 3,164 3,964 5,355 -1,391 600 5,148 5,748 3,964 1,784

Sally Wong Balance Sheet extract at 31 December 2006

Current Assets Debtors (130,000 700) Less provision for doubtful debts

129,300 5,748 123,552

(c) (i) Bad debts are debts that have proved to be uncollectable and are therefore written off as an expense in the P & L account. (ii) Provision for doubtful debts is debts that are unlikely to be paid and are therefore deducted from the debtors on the Balance Sheet.

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QUESTION 3 DMS plc has an authorised capital of 500,000 ordinary shares at 0.50 each and 100,000 6% preference shares at 1 each. The following balances appeared in the company's books after the preparation of the profit & loss account for the year ended 30 June 2006: Issued capital: 400,000 0.50 ordinary shares fully paid 200,000 50,000 6% 1 preference shares fully paid 50,000 Freehold land and buildings at cost 420,000 Stock 57,800 10% debentures (repayable 2012) 40,000 Trade debtors 24,800 Trade creditors 9,400 Expenses prepaid 850 Share premium 76,220 General reserve 40,000 Expenses accrued 530 Profit and loss account balance at 1 July 2005 46,200 Bank (Cr) 1,600 Fixtures & fittings: at cost 63,000 provision for depreciation 28,500 Preference interim dividend paid 1,500 Ordinary interim dividend paid 10,000 The company's trading & profit and loss accounts had been prepared and revealed a net profit of 84,100. However, this figure and certain balances shown above needed adjustment in view of the following details which had not been recorded in the company's books. (i) It appeared that a trade debtor who owed 400 would not be able to pay. It was decided to write off his account as a bad debt. An examination of the company's stock on 30 June 2006 revealed that some items shown in the accounts at a cost of 2,300 had deteriorated and had a resale value of only 1,700. At the end of the financial year some fixtures & fittings which had cost 4,200 and which had a net book value of 900 had been sold for 1,400. A cheque for this amount had been received on 30 June 2006 and had been entered only in the cash book. No depreciation is accounted for in the year of sale. A half-years debenture interest is unpaid.

(ii)

(iii)

(iv) REQUIRED: (a)

Prepare a statement which shows the changes that should be made to the net profit of 84,100, in view of these unrecorded details.

The directors proposed to pay a final dividend of 5% to ordinary shareholders and to transfer 60,000 to the general reserve on 30 June 2006. (b) Prepare for DMS plc (taking into account all the available information) the Appropriation Account for the year ended 30 June 2006. Prepare DMSs Balance Sheet at 30 June 2006, in vertical format.

(c)

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MODEL ANSWER TO QUESTION 3 (a) DMS plc: Calculation of corrected net profit 84,100 500 84,600 2,000 400 600

Original net profit Add Profit on sale of equipment Less Debenture Interest Bad debt written off Stock reduced to net realisable value Corrected net profit

3,000 81,600

(b)

DMS plc Appropriation Account for the year ended 30 June 2006 81,600 60,000 10,000 1,500 10,000 1,500

Net profit for the year brought down Less Transfer to general reserve Interim ordinary dividend Interim preference dividend Proposed ordinary dividend Proposed preference dividend Retained loss for the year Add Retained profit from last year Retained profit carried down to next year

83,000 (1,400) 46,200 44,800

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CONTINUED ON THE NEXT PAGE

MODEL ANSWER TO QUESTION 3 CONTINUED (c) DMS plc Balance Sheet at 30 June 2006 Cost Acc. Dep. 420,000 58,800 478,800 25,200 25,200

NBV 420,000 33,600 453,600

Fixed Assets Freehold Land & buildings Fixtures & fittings (63,000 4,200)

[1]

Current Assets Stock (57,800 600) Debtors (24,800 400) Prepayments Creditors due within 1 year Trade creditors Debenture interest accrued Accrued expenses Proposed dividend Bank overdraft Net Current Assets/Working Capital Creditors due after more than 1 year 10% debentures

57,200 24,400 850 82,450 9,400 2,000 530 11,500 1,600 25,030 57,420 511,020 40,000 471,020

Authorised capital 500,000 0.50 ordinary shares 100,000 6% 1 preference shares

250,000 100,000 350,000

Capital & Reserves Called up ordinary share capital: 400,000 0.50 ordinary shares Share premium General reserve (40,000 + 60,000) Profit & Loss account Ordinary shareholders funds 50,000 6% 1 preference shares

200,000 76,220 100,000 44,800 421,020 50,000 471,020

Workings [1] 28,500 3,300 = 25,200

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QUESTION 4 A Lam extracted a trial balance at 31 December 2006 and found that it did not balance. She posted the difference to a suspense account. Subsequently, she found the following errors, which resulted in the difference: (1) A payment by A Lam of 87 for a telephone bill had been entered in the cash book, but the double entry had not been made. A Lam purchased new fittings for her shop, costing 2,900, but this transaction had been posted to the purchases account. A payment of 67 for stationery had been posted to that account as 76. The bank account entry was correct. A Lam had paid 3,750 cash for stock for her shop but no entries had been made in her books. A payment of 320 to A Lam from a debtor C Chung had been debited to the account of D Chang in error. The cashbook entry was correct. The total of 76 for discount allowed had been posted to the credit side of the discount received account. A balance of 200 for general expenses had been omitted from the trial balance. A sale of 262 to D Mei had been posted correctly to the personal account but entered in error in the sales day book as 226.

(2)

(3)

(4)

(5)

(6)

(7) (8)

REQUIRED (a) (b) Prepare journal entries, without narratives, to correct the above errors. Prepare the suspense account.

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MODEL ANSWER TO QUESTION 4 (a) Journal entries Dr 87 Cr 87 2,900 2,900 9 9 3,750 3,750 640 320 320 76 76 152

Telephone / Telephone bill Suspense account Fittings Purchases Suspense account Stationery Purchases Cash Suspense account D Chang C Chung Discount received Discount allowed Suspense account

No debit entry Suspense account Suspense account Sales 36

200

36

(b) D Chang C Chung Stationery Sales 320 320 9 36 685

Suspense Account Difference on Trial Balance Telephone/Telephone Bill Discount allowed Discount received General expenses 246 87 76 76 200 685

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