HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

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

1. The opening provision for doubtful debts is $67000 in the accounts of Nicam Limited. However,
the accountant decides that the closing provision is to be $58000.
Required:
a. Give two reasons why a business might create a provision for doubtful debts. (4 marks)
b. Give one reason why the accountant may wish to reduce this provision. (2 marks)
c. How will the reduction in provision for doubtful debts be shown in the profit and loss account
of Nicam Limited? (1 mark)
d. How will the amount of the new provision be shown in the balance sheet of Nicam Limited? (1
mark)
e. Identify the two major accounting concepts I the above case. (2 marks)

2. The financial information of Games Limited for the year ended 31 December 1996 is presented
below:
$ $
Credit sales 504000

Opening stock 84000

Add: Purchases 382200
466200
Less: Closing stock 154000
Cost of sales 312200
Gross profit 191800

Net profit 47600

Balance sheet as at 31 December 1996

$ $
Fixed assets (at net book value)

Plant and equipment 610400

Furniture and fittings 173600
784000
Current assets
Stock 154000
Debtors 105000
Bank 7000 266000
1050000
Shareholders’ fund
Share capital ($1 ordinary shares) 770000
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

Retained earnings 64400

834400
Current liabilities
Creditors 168000
Accruals 47600 215600
1050000
Required:
a. Calculate the following for 1996:
(i) Working capital
(ii) Return on capital employed
(iii) Quick ratio
(iv) Stock turnover rate
(v) Debtors’ collection period (in months)
(vi) Creditors’ repayment period (in months)
(Calculations to one decimal place.) (6 marks)
b. Give two possible dangers of having too little working capital. (4 marks)

3. The draft final accounts of a sole trader for the year ended 30 April 1997 showed a net profit of
$78500.
Subsequent investigation revealed the following errors and omissions:
i. The trader had paid himself a salary of $25000 over the period and had charged this sum to
wages and salaries.
ii. The book-keeper had been instructed to write off $3500 from a customer’s account as a bad
debt, and to reduce the provision for doubtful debts by $4200. By mistake, however, he had
written off $4200 from the customer’s account and increased the provision for doubtful debts
by $3500.
iii. The plant and equipment has been depreciated at an annual amount of $32500. However, a
more realistic figure of $48750 should have been used starting from 1 May 1996.
iv. Part of the business premises are let out, but rent to the sum of $24000 has not been
received. No entries in respect of this have been made in the books.
v. An amount of $300 received from a debtor and paid into the bank on 30 April 1997 has been
completely omitted from the books.
Required:
a. Prepare journal entries to correct the above. (Narrations are not required.) (7 marks)
b. Prepare a statement of adjusted profits for the year ended 30 April 1997. (3 marks)

4. The Prince Company Limited operates its petty cash account on the imprest system. It is
maintained at a float of $1500 on the first day of each month.
At 31 March 1997, the petty cash box held $240.30 in cash. During April 1997, the following
petty cash transactions were made:
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED
1997 $
April 1 Cash received to restore imprest ?

1 Bus fares 4.50

5 MTR common stored value ticket 70.00
8 Postage stamps 15.00
9 Magazines 65.00
11 Pencil sharpener 36.00
12 Parcel postage 58.00
14 Ball pens 50.00
20 Registered letters 41.00
21 Lunch – entertaining customers 280.00
23 Tram fares 3.60
24 Photocopier paper 48.00
24 Wall clock 123.00
26 Note pads 12.00
Donations to Hong Kong Committee for UNICEF
30 300.00
May 1 Cash received to restore imprest ?

The company opens the following five accounts in the ledger: travelling expense, stationery,
postage, entertainment and sundries.
Required:
a. Record the above transactions for the period 1 April to 1 May in a columnar petty cash book.
(8 marks)
b. Explain the purpose to a business of keeping a petty cash float.
(2 marks)

5. Hall Limited had the following transactions in 1996:

February 28 Sales to Tommy Limited, $9800 of which $3200 was received in
cash.
March 1 Sales to Victoria Limited, $6180.

Drew a bill for the amount owed by Victoria Limited for three
months.
Tommy Limited returned goods amounting to $400.
March 16 Drew a bill for the amount owed by Tommy Limited for four
months.
April 1 Discounted the bill from Tommy Limited at 12% per annum with
Discounting Bank Limited.
June 1 Victoria Limited dishonoured its bill, but accepted a new one for a
further three months plus interest at 14% per annum.
July 16 Tommy Limited’s bill was honoured.
September 1 Victoria Limited paid the bill on maturity.

Required:
Prepare journal entries in the books of Hall Limited to record the above transactions. (Narrations
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

are not required.) (10 marks)

6. The total balances extracted from the sales ledger of a trading firm on 31 December 1996
amounted to $25374, which did not agree with the balance of $24801 on the sales ledger control
account. The following errors were subsequently discovered:
i. Discounts allowed had been correctly posted to individual debtors’ accounts, but had been
over-added by $300 in the discount column in the cash book.
ii. A credit balance of $637 on one debtor’s account had been included in the debtors’ schedule
as a debit balance.
iii. A sales invoice for $425 was entered twice in the sales journal and posted twice to the
personal account of a debtor.
iv. A bad debt recovery of $150 had been correctly recorded in the debtor’s account, but no
entries had been made in the control account.
v. A cheque for $2567 received from a customer had been posted to his account as $2576.
vi. The sales journal was overcast by $892.
vii. The credit side of one debtor’s account had been over-added by $100.
Required:
a. Draw up the sales ledger control account to find out the correct balance. (5 marks)
b. Prepare a statement to show the revised total of the sales ledger balances. (5 marks)
Section B
Answer any THREE questions from this section. Each question carries 20 marks.

7. The following trial balance was extracted from the books of Linda Limited at 31 March 1997:
$ $
500000 8% preference shares of $1 each, fully paid 500000

500000 ordinary shares of $1 each, fully paid 500000

10% debentures (issued in 1994) 100000
Plant and machinery, at cost 1700000
Furniture and fittings, at cost 420000
Provision for depreciation, 1 April 1996
Plant and machinery 350000
Furniture and fittings 150000
General reserve 42000
Retained profits 124365
Trade debtors 480600
Stock, 1 April 1996 17060
Trade creditors 383272
Debenture interest 5000
Provision for doubtful debts, 1 April 1996 12404
Share premium 50000
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

Carriage inwards 5600

Wages and salaries 320000
Purchases 1694000
Rent and rates 365000
Sundry expenses 17210
Discounts received 2560
Cash at bank 271931
Interim preference dividend 18000
Interim ordinary dividend 20000
Bad debts 7800
Sales 2945000
Suspense account 182600
5342201 5342201
Additional information:
i. Depreciation was to be charged as follows:
Plant and machinery - 10% on cost
Furniture and fittings – 15% on net book value
ii. Stock as at 31 March 1997 amounted to $24180.
iii. The following adjustments were to be made on 31 March 1997:
$

Accrued wages and salaries 5000

Prepaid rent and rates 6000
Provision for doubtful debts was to be maintained at 3% of trade debtors.
iv. The board of directors proposed to transfer $100000 to general reserve and to declare a final
dividend of 5% on ordinary shares.
v. In March 1997, 100000 ordinary shares were offered to the public at $1.25 per share, and
$60000 10% debentures were issued at 96. The company debited the cash at bank account
and credited the suspense account in respect of these issues. The new shares were not
entitled to the dividend proposed for the year ended 31 March 1997. One month’s interest
was to be paid on the new debentures.
Required to prepare:
a. the trading, profit and loss and appropriation account of Linda Limited for the year ended 31
March 1997. (9 marks)
b. the balance sheet of Linda Limited as at the same date. (11 marks)
8. The annual stocktaking of Leader Limited did not take place at the company’s year ended on 31
March 1997. However, stock had been taken on 31 December 1996 for interim reporting
purpose.
Subsequent investigation revealed the following information:
i. Stock at 31 December 1996 was $52673.
ii. Selling prices are determined by a 20% mark-up on cost.
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

iii. Goods sent to customers in the period January to March 1997 amounting to $48000 at
selling price had not yet been invoiced.
iv. Goods costing $1000 included in the stock valuation at 31 December 1996 was found to be
worthless on 31 March 1997.
v. The stock valuation of 31 December 1996 included $750 stationery stock and $1600 office
equipment, both valued at cost.
vi. Goods invoiced to customers in the period January to March 1997 amounted to $66000.
vii. One of the stock sheets of 31 December 1996 had been over-added by $1104.
viii. Goods purchased in the quarter ended 31 March 1997 amounted to $84226 had been
received and recorded.
ix. During the three months ended 31 March 1997, goods returned to suppliers amounted to
$734 and goods returned by customers amounted to $876, at selling price.
x. Goods with a selling price of $840 were sent on 1 March 1997 on a sale or return basis to
a customer. This transaction had been recorded as sales.
xi. Goods costing $900 were damaged and it would cost $300 to restore them to a saleable
condition. There would be no change in the selling price obtainable.
Required:
a. Draw up a statement to compute the appropriate stock value as at 31 March 1997. (16 marks)
b. What is a stocktaking and how often should it be carried out? (4 marks)

9. Mr Lee started business as a retailer on 1 May 1995. He has not kept a full set of books, but all
cash transactions are dealt with through an account with a bank.
You have been asked to prepare the final accounts in order to ascertain his operating
performance and financial status in respect of the year ended 30 April 1997. The following
information is available:
i. The assets and liabilities of Mr Lee at 30 April 1996 and 30 April 1997 were as follows:
1996 1997

$ $
Furniture and fixtures, at cost 43500 61500

Provision for depreciation – furniture and fixtures 4350 ?

Stock 63450 53400
Trade debtors 56400 34650
Prepaid rates 1125 1350
Cash at bank -- 17850
Trade creditors 50850 58800
Accrued electricity 750 1050
Bank overdraft 31500 --
ii. Some of the business transactions for the year ended 30 April 1997 effected through the
bank account were as follows:
$

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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED
Wages 81000

Suppliers of goods 377100

Rent, rates and electricity 15150
Sundry expenses 11190
Proceeds from sale of furniture 37500
iii. Goods costing $9000 were drawn by Mr Lee for his own use.
iv. Furniture costing $20000, with a net book value of $18000, had been disposed of during
the year. The annual depreciation expense is being calculated at the rate of 10% based on
the cost of the assets still held in the business at the year end.
v. The source of all cash received was from trade debtors, except for the proceeds received
on sale of furniture; and all cash received has been banked, except the withdrawals of
$80000 by Mr Lee.
Required:
a. Draw up the business bank account for the year ended 30 April 1997. (5 marks)
b. Prepare a trading and profit and loss account for the year ended 30 April 1997 and a balance
sheet as at that date. (15 marks)

10. Cheung and Wong were partners sharing profits and losses in the ratio of 1:3 respectively.
The following trial balance as at 31 March 1997 was extracted from the books of the partnership:
$ $
Net profit for the year 40000

Capital accounts:
Cheung 870000
Wong 800000
Current accounts:
Cheung 8500
Wong 18500
Premises 1080000
Vehicles 504000
Furniture 144000
Stock 272379
Debtors 320000
Bank 8880
Loan-Cheung
360000
Creditors 249259
2337759 2337759
After preparing the above trial balance, the following adjustments to net profit needed to be
made:
i. A provision for doubtful debts was to be made at 5% of debtors.
ii. Salaries included $6000 cash drawings by Wong in March 1997.
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HKCEE-PRINCIPLES OF ACCOUNTS ALL RIGHTS RESERVED

At the date of the trial balance, Cheung retired and Ho was admitted to the partnership with
Wong. The following details were agreed on:
i. The following assets were to be revalued at:
$
Premises 1480000

Vehicles 380000
Stock 212379
ii. Wong and Ho were to share profits and losses equally.
iii. The goodwill of the old partnership was estimated to be worth $200000, but no goodwill
account was to be maintained.
iv. Cheung was to take over a vehicle valued at $128000. The balance owing to him was to
be retained as a loan to the new partnership, except for $445000 which was to be settled
in cash.
v. Wong was to withdraw cash so that his fixed capital balance would be maintained at
$800000.
vi. Ho was to introduce $650000 cash as capital, but no extra cash was to be paid in for his
share of goodwill.
Required to prepare:
a. the partnership profit and loss appropriation account of Cheung and Wong for the year ended
31 March 1997. (2 marks)
b. the revaluation account of the partnership. (3 marks)
c. the partners’ capital and current accounts in columnar form. (8 marks)
d. a balance sheet for the new partnership of Wong and Ho as at 31 March 1997. (7 marks)

END OF PAPER