HKCEE (2010, 1) (Accounting Principles)
(A) Lidia Design has employed Bill Chan, a famous and experienced designer, for a contract period of three years. Bill Chan is to be paid a monthly salary of $100,000 plus a commission of 5% on the revenues of his projects. Since the company considers Bill Chan to be a valuable asset of the business, it capitalises an amount of $3,600,000, the total salary payable to Bill Chan, as an intangible asset on its balance sheet.
REQUIRED:
State the accounting principle or concept that has been violated and give an explanation.
(A) / Quantifiability- Only transactions capable of being expressed in monetary terms should be included in the accounting
records of a business entity.
- The value of the designer cannot be measured in monetary terms and should not be recorded in the
accounts of the business.
- The total amount of salary payable to the designer does not reflect the value of the employee to the
business
(B) For each of the following transactions, show the double entries required and the NET effects on the accounting equation (Assets = Liabilities + Capital)
Entries required / Net effects on the accounting equationExample:
The owner took from the business $100,000 cash and goods at a cost of $20,000 / Debit: Drawings $120,000
Credit: Cash $100,000
Credit: Purchases $20,000 / Decrease assets
Decrease capital
(a) Paid delivery expenses of $800 in cash on behalf of a customer. / ? / ?
(b) Paid $500 for repairs and $1,500 for future maintenance of a machine. The two amounts were made by a cheque of $2,000. / ? / ?
(c) Borrowed a short-term loan of $100,000 from a bank and repaid an overdue amount of $95,000 owed to a supplier. / ? / ?
(d) The owner returned cash of $2,000 into the business and paid $500 for accrued expenses which had been recorded by the business one week ago. (The total amount of $2,500 had previously been withdrawn by the owner for private use.) / ? / ?
(B)
Entries required / $ / Net Effects(a) / Debit: Debtors / 800 / No effect
Credit: Cash / 800
(b) / Debit: Repair expenses / 500 / Decrease assets
Debit: Prepaid maintenance expenses / 1,500 / Decrease capital
Credit: Bank / 2,000
(c) / Debit: Bank / 5,000 / Increase assets
Debit: Creditors / 9,5000 / Increase liabilities
Credit: Bank loan / 100,000
(d) / Debit: Cash / 2,000 / Increase assets
Debit: Accrued expenses / 500 / Decrease liabilities
Credit: Drawings/Capital / 2,500 / Increase capital
HKCEE (2010, 2) (Accounting Principles)
(A) Paul Kan owns two firms: AB Company and XE Company. The former acts as the purchasing agent for the latter. During the year ended 31 December 2009, AB Company made purchases of $700,000, of which 98% belonged to XE Company. Paul Kan suggests recording the whole amount as purchases in the books of AB Company to simplify the accounting procedures of his two businesses.
REQUIRED:
State how the purchases should be recorded and briefly explain the accounting principle or concept that should be adopted.
(Accrual and prepayment)
(B) Viola Company generates income by letting its office premises to tenants who are required to pay monthly rentals in advance.
During 2008, the company had received in advance $28,000 in respect of rent for January 2009; and at 31 December 2008, an amount of $12,000 was owed by a tenant.
In 2009, the company received from the tenants cheques amounting to $730,000 which included a refundable rental deposit of $100,000 and rent in advance for 2010 of $32,000. A rental deposit of $55,000 was refunded to a tenant in November 2009. At 31 December 2009, rentals from a tenant of $10,000 per month, which were due on 16 November and 16 December 2009, remained unpaid.
During 2009, rates were paid by cheques quarterly on 1 January, 1 April, 1 July and 1 October. Details are as follows:
$3 months to 28 February 2009 / 1830
3 months to 31 May 2009 / 2160
3 months to 31 August 2009 / 2160
3 months to 30 November 2009 / 2160
8310
Rates amounting to $2,160 for the three months to 28 February 2010 has not yet been paid by the company as at 31 December 2009.
REQUIRED:
In the books of Viola Company, show the entries in the following accounts for the year ended 31 December 2009:
(a) the rental income account; and
(b) the rates account.
(A) / - Business entity principle should be adopted- Accounting records should be kept separately for each firm.
- AB Company and XE Company are required to record their own purchases.
- AB Company and XE Company should record purchases of $14,000 and $686,000 respectively.
- $686,000 should be recorded as the amount due from XE Company to AB Company.
(B)
(a)
Rental income2009 / $ / 2009 / $
Jan / 1 / Accrued b/d / 12,000 / Jan / 1 / Prepaid b/d / 28,000
Dec / 31 / Profit and loss / 629,000 / Bank ($730,000 - $100,000) / 630,000
Dec / 31 / Prepaid c/d / 32,000 / Dec / 31 / Accrued c/d ($10,000 + $10,000 x 1/2) / 15,000
673,000 / 673,000
(b)
Rates2009 / $ / 2009 / $
Jan / 1 / Bank / 1,830 / Jan / 1 / Accrued b/d ($1,830 x 1/3) / 610
Apr / 1 / Bank / 2,160 / Dec / 31 / Profit and loss / 8,420
Jul / 1 / Bank / 2,160
Oct / 1 / Bank / 2,160
Dec / 31 / Accrued c/d ($2,160 x 1/3) / 720
9,030 / 9,030
HKCEE (2010, 3) (Bank Rec)
Jane Ho is a sole proprietor who keeps records of her cash and bank transactions in a three-column cash book. The balances in the cash book at 1 March 2010 were: cash $38,900 and bank overdraft $6,240. Jane made the following transactions during the month of March 2010:
March / 2 / Sales with a list price of $8,000 were made to a customer at a discount of 10% on 25 February 2010. The customer settled his account balance by cheque after deducting a 3% cash discount.5 / From the proceeds of cash sales, paid $1,000 for cash purchases of trading goods and banked the remaining $4,600.
11 / Settled a supplier’s outstanding account of $3,000 by cheque after deducting a 5% cash discount.
16 / A customer paid cash $19,600 to settle her debt. A 2% cash discount was allowed for early settlement.
22 / Paid suppliers in cash $16,500.
29 / Banked cheques of $27,800 from customers through an Automatic Teller Machine (ATM).
30 / Paid salaries in cash $14,000.
31 / Banked a cheque of $3,007 from a customer in full settlement of his account of $3,100.
Jane Ho received a bank statement which showed a credit balance of $27,194 as at 31 March 2010. An examination of the bank column in the cash book and the bank statement disclosed the following discrepancies:
(i) Bank lodgement on 31 March 2010 had not yet been recorded by the bank.
(ii) A bank service charge of $300 had been debited by the bank on 26 March 2010. However, an amount of $100 had been overcharged and was refunded by the bank on 31 March 2010.
(iii) Cheques drawn totaling $19,200 had not been presented to the bank.
(iv) An autopay payment of $18,000 was made by the bank for rent.
(v) A post-dated cheque of $4,100 received from a customer was banked on 29 March 2010, but it was returned by the bank.
REQUIRED:
(a) Prepare a three-column cash book for the month of March 2010, incorporating the necessary updates to be made on 31 March 2010.
(b) Prepare a bank reconciliation statement as at 31 March 2010 commencing with the bank statement balance and ending with the updated cash book balance in (a) above.
(a)
Cash Book2010 / Details / Discount / Cash / Bank / 2010 / Details / Discount / Cash / Bank
Mar / $ / $ / $ / Mar / $ / $ / $
1 / Balance b/d / 38,900 / 1 / Balance b/d / 6,240
2 / Debtors / 216 / 6,984 / 5 / Purchases / 1,000
5 / Sales / 5,600 / 5 / Bank / 4,600
5 / Cash / 4,600 / 11 / Creditors / 150 / 2,850
16 / Debtors / 400 / 19,600 / 22 / Creditors / 16,500
29 / Debtors / 27,800 / 30 / Salaries / 14,000
31 / Debtors / 93 / 3,007 / 31 / Bank service charge (ii) / 200
31 / Balance c/d / 31 / Rent (iv) / 18,000
31 / Debtors (v) / 4,100
31 / Balance c/d / 28,000 / 11,001
709 / 64,100 / 42,391 / 150 / 64,100 / 42,391
(b)
Bank reconciliation statement as at 31 March 2010$
Balance as per bank statement / 27,194
Add Lodgement not yet recorded by bank (i) / 3,007
30,201
Less Unpresented cheques (iii) / 19,200
Balances as per updated cash book / 11,001
HKCEE (2010, 4) (Accounting for partnership)
Ron and Sue were in partnership sharing profits and losses in the ratio of 3 : 2 respectively. Their trial balance as at the financial year ended 31 December 2009 was as follows:
Debit / Credit$ / $
Capital accounts:
Ron / 200,000
Sue / 150,000
10% loan from Ron, payable on 31 December 2012 / 90,000
Debtors and creditors / 27,000 / 60,000
Bank / 59,300
Motor vehicles (net) / 160,800
Office equipment (net) / 346,500
Stock / 25,000
559,300 / 559,300
The 10% loan was borrowed on 1 June 2009 for the purchase of a new office equipment on 1 July 2009. Depreciation on office equipment was to be provided at 20% per annum on cost. No depreciation had yet been provided on the new office equipment and interest on the loan had not yet been accrued in the books as at 31 December 2009.
On 1 January 2010, Ron and Sue agreed to admit Tim, their former supplier, into the partnership on the following terms:
(i) Ron, Sue and Tim were to share profits and losses in the ratio of 3 : 3 : 2 respectively.
(ii) Goodwill was estimated to have a value of $180,000. No goodwill account was to be kept in the books of the partnership.
(iii) Tim was required to repay 80% of the amount owed to the creditors and to bring in trading goods with an agreed value of $33,000. He made a payment by cheque for his share of goodwill.
(iv) Stock was to be written down to $24,500 whereas bad debts were estimated to be $1,350.
Required:
(a) Prepare the capital accounts of Ron, Sue and Tim in columnar form.
(b) Prepare a statement showing the calculation of the working capital of the new partnership as at 1 January 2010.
(a)
Capital
/ Ron / Sue / Tim / Ron / Sue / Tim$ / $ / $ / $ / $ / $
Share of loss (3:2) / 8,550 / 5,700 / — / Balances b/d / 200,000 / 150,000 / —
Goodwill (3:3:2) / 67,500 / 67,500 / 45,000 / Goodwill (3:2) / 108,000 / 72,000 / —
Revaluation loss / 1,110 / 740 / — / Creditors / — / — / 48,000
Balances c/d / 230,840 / 148,060 / 81,000 / Stock / — / — / 33,000
Bank / — / — / 45,000
308,000 / 222,000 / 126,000 / 308,000 / 222,000 / 126,000
(b)
Statement to show the calculation of working capital as at 1 January 2010$ / $
Current assets
Stock ($24,500 + $33,000) / 57,500
Debtors ($27,000 - $1,350) / 25,650
83,150
Less: Current liabilities
Creditors ($60,000 x 20%) / 12,000
Accrued interest ($90,000x10%x7/12) / 5,250
Bank overdraft ($59,300 - $45,000) / 14,300 / 31,550
Working capital / 51,600
HKCEE (2010, 5) (Financial Reporting)
The following trial balance was extracted from the books of Fatima Limited as at 31 December 2009:
Debit / Credit$ / $
Motor vehicles, at cost / 1,300,000
Office equipment, at cost / 3,590,000
Stock, 1 January 2009 / 182,200
Accumulated depreciation – motor vehicles, 1 January 2009 / 420,000
Accumulated depreciation – office equipment, 1 January 2009 / 948,000
Disposal of assets / 60,000
Share issue / 704,000
Purchases / 1,083,000
Bad debts / 57,680
Sales returns / 67,000
Selling and distribution expenses / 401,600
Administrative expenses / 264,200
Carriage inwards / 13,600
Salaries / 505,000
Rent and rates / 314,000
Ordinary dividend / 50,000
Cash at bank / 85,320
Trade debtors / 798,400
5% bank fixed deposit / 100,000
Trade creditors / 821,200
Sales / 4,270,000
500,000 ordinary shares of $2 each, fully paid / 1,000,000
Share premium / 151,300
General reserve / 140,000
Retained profits, 1 January 2009 / 297,500
8,812,000 / 8,812,000
Additional information:
(i) Stock as at 31 December 2009 amounted to $204,350 which included defective goods of $10,000. As agreed, these goods were to be returned to the supplier. No entries had been made for this return.
(ii) Free samples were sent to a customer on 29 December 2009. This was recorded as a credit sale of $900.
(iii) A motor vehicle which was purchased on 1 January 2008 for $120,000 was sold on 30 November 2009 for $60,000 through an agent. The sales proceeds received had been debited to cash and credited to the disposal of assets account. No other entries had been made. A commission of 5% on the sales proceeds was to be paid to the agent on 3 January 2010.
(iv) Annual depreciation was to be charged as follows:
Motor vehicles – 20% on a reducing-balance basis
Office equipment – 25% on a straight-line basis
(v) At 31 December 2009, prepaid selling and distribution expenses and accrued administrative expenses amounted to $3,600 and $5,200 respectively.
(vi) The 5% bank fixed deposit was made on 1 July 2009 for a period of one year.
(vii) The board of directors proposed a transfer $200,000 to general reserve.
(viii) On 22 December 2009, 300,000 ordinary shares were issued at $2.20 per share. Subscriptions had been received for 320,000 shares. All subscription money had been credited to the share issue account. Excess subscriptions were to be refunded to unsuccessful applicants on 5 January 2010.