2001(P2)

  1. Wai Kuen Ltd had an authorized capital consisting of 7 000 000 ordinary shares of $0.5 each and

5 000 000 10% preference shares of $1 each. It was incorporated on 1 April 1999 and took over the partnership of Lau Wai and Cheung Kuen as of 1 January 1999.

The information concerning the raising of capital by Wai Kuen Ltd is as follows:

(i)The net assets of the partnership were taken over at their net book value of $1 340 000. The purchase consideration was agreed to be settled through an issue of 2 000 000 ordinary shares at $0.7 each to Lau Wai and Cheung Kuen on 1 April 1999. The company also issued an additional 1 000 000 shares to the public at $0.7 each, payable in full upon application. The shares were fully subscribed and paid for on 30 April 1999.

(ii)On 16 September 1999, the company made a bonus issue of 1 ordinary share for every 5 ordinary shares in issue from its share premium.

(iii)On 30 September 1999, Wai Kuen Ltd issued $300 000 10% debentures at 98. Interest was payable half-yearly on 1 October and 1 April.

(iv)On 20December 1999, the company received cash of $345 000 from an issue of preference shares at a premium of $0.15 each.

You are required to:

(a) Prepare the journal entries necessary for recording (i) to (v) above. (12marks)

Additional information in relation to the preparation of the profit and loss account for the year ended 31 December 1999 is given below:

(vi)The business of the partnership was seasonal. The monthly average sales in March, April and May were double those of the other months of the year.

(vii)The totals sales for the year ended 31 December 1999 amounted to $3 600 000. Goods were sold at a mark-up of 25% throughout the year.

(viii)Lau Wai was entitled to a monthly salary of $2400. The salary of Cheung Kuen was half that of Lau Wai. From 1 April 1999 onwards, they received director’s remuneration instead. Lau Wai’s monthly rate was increased by 10% upon the formation of the company while Cheung Kuen’s monthly rate was increased by 20% with effect from 1 July 1999.

(ix)Legal expenses amounted to $42 000 for the year, of which 75% was formation expenses and 25% was for debt collection. It was decided that formation expenses were to be written off after the company had been formed and the debt collection fee would be apportioned on a sales basis.

(x)Selling expenses for the year amounted to $152 700 and varied in direct proportion to sales.

(xi)Administration expenses (excluding all of the above) for the year amounted to $123 600 and were to be accrued evenly throughout the year.

(xii)The discount on debentures was to be amortized over five years on a monthly basis.

(xiii)A sinking fund was set up for the purpose of debenture redemption by an annual appropriation of $60 000, investing the same amount, together with any investment income received during the year, in riskless securities so as to provide cash for redemption.

(xiv)No dividend was paid or declared for both ordinary shares and preference shares for the year 1999.

You are required to:

(b) Prepare for Wai Kuen Ltd the profit and loss appropriation account for the year ended 31 December 1999 in columnar form for the pre-and post-incorporation period. (11 marks)

On 1 October 2000, a dividend of $590 was received on the sinking fund investment.

On 30 November 2000, $48 000 10% debentures were redeemed in the open market at 102. Sinking fund investment costing $50 000 were sold at a profit of $3000.

It is the company’s policy to transfer an equivalent amount to capital reserve upon each redemption.

You are required to:

(c)Prepare the following ledger accounts for the year ended 31 December 2000”

(i) sinking fund investment. (2 marks)

(ii) debenture redemption, and (2 marks)

(iii) sinking fund. (3 marks)

  1. Cashow Ltd is incorporated in Hong Kong. Its financial statements are shown as follow:

Profit and loss account

For the year ended 31 March 2001

$'000
Turnover / 274 650
Less: Cost of sales / 151 055
Gross profit / 123 595
Interest income / 18 900
Profit on sale of investment / 25 000
Profit on redemption of debentures / 1 700
169 195
Less: Expenses / 75 770
Profit before tax / 93 425
Less: Taxation / 16 215
Profit after tax / 77 210
Less: Proposed dividend / 21 500
Retained profit for the year / 55 710

Balance sheet as at 31 March

2001 / 2001 / 2000 / 2000
$'000 / $'000 / $'000 / $'000
Fixed Assets
Land at cost / 200 000 / -
Machinery at cost / 158 025 / 170 025
Less : Provision for depreciation of machinery / 63 165 / 94 860 / 60 800 / 109 225
294 860
Investment / 50 000 / 100 000
344 860 / 209 225
Current Assets
Stock / 72 795 / 75 600
Debtors / 46 325 / 50 400
Interest receivable / 28 020 / 21 000
Bank / 203 990 / 31 500
351 130 / 178 500
Current Liabilities
Short-term loan (repayable in July 2001) / 13 535 / -
Creditors / 10 797 / 22 500
Accrued share issue expenses / 2 133 / -
Interest payable / 13 325 / 11 975
Taxation / 23 775 / 19 580
Dividend / 21 500 / 16 950
Bank overdraft / 1 875 / 4 650
86 940 / 75 655
Working capital / 264 190 / 102 845
609 050 / 312 070
Financed by:
Capital and Reserves
Share capital at $1 each / 473 400 / 202 300
Share premium / 18 200 / 10 200
Profit and loss / 73 210 / 37 500
564 810 / 250 000
Long-term Liabilities
10% debentures / 44 240 / 62 070
609 050 / 312 070

Notes:

(i)The expense in the profit and loss account consisted of the following:

$'000
Interest expenses / 9 450
Depreciation / 13 620
Loss on disposal of machinery / 5 665
Wages and salaries / 27 112
Sundry expenses / 19 923
75 770

(ii)During the year ended 31 March 2001, only one machine costing $22 500 000 was sold for $5 580 000.

(iii)During the year, Cashcow Ltd increased the authorized share capital by $500 000 000.

(iv)On 1 April 2000, the following share issues were made:

(1)There was a bonus issue of 20 000 000 shares out of the retained profits to the existing shareholders.

(2)An additional 200 000 000 shares were issued at par in exchange for a parcel of land from another company.

(3)Other shares were issued to the public at a premium and payable in full upon application.

(v)The expenses of all of the above share issues amounted to $2 133 000 but were not yet paid. The amount had already been written off against the share premium. All sundry expenses for the year were paid in cash. There were no accrued wages and salaries at both 31 March 2000 and 31 March 2001.

(vi)All sales and purchases for the year on credit.

(vii)The trade association to which Cashow Limited belongs had produced the following ratios, being averages calculated from data submitted by its members:

Current ratio / 2.3 :1
Acid test ratio / 1.2 :1

You are required to:

(a)Prepare the cash flow statement for the year ended 31 March 2001 using the direct method, together with the analysis of balances of cash and cash equivalents disclosed on the face of the statement.

(16 marks)

(b)Show the following notes to the cash flow statement;

(i)reconciliation of operating profit to the net cash inflow from operating activities, and

(5 marks)

(ii)analysis of charges in financing the year. (3 marks)

(c) With the aid of the ratios produced by the trade association, comment, with explanations, on the liquidity of the company for the year. (4 marks)

(d) Calculate the earnings per share as at 31 March 2001. (2 marks)