MOCK EXAMINATION PAPER 1

SECTION A

QUESTION 1

(A) (a) Going concern

It is assumed that a business will continue to operate in the foreseeable future. There is no intention to liquidate
the business.
For example, fixed assets are recorded at historical cost rather than current market value. It is because the
owner intends to use these assets in the business for a long period of time instead of disposing them shortly.
(Or any other acceptable answers.) (3 marks)

(b) Matching
Revenues are recognised when they are earned, not when they are received. Expenses are recognised when
they are incurred, not when they are paid. Revenues are matched with their relevant expenses in the same
period.
For example, the cost of a fixed asset will not be wholly charged as an expense in the year of acquisition. It will
be written off as depreciation in the profit and loss account over the years in use.
(Or any other acceptable answers.) (3 marks)

(B) (a) Business entity concept is violated.

The concept states that a business is treated as a separate entity from its owner. Therefore, private transactions
and assets of the owner and his wife should not be entered in the business books, unless the question states
that the premises would be used by Mr Yau’s business, in which case they should be entered as a loan:
Dr Premises
Cr Loan from Mrs Yau
In the above situation, the premises should not be treated as a contribution of capital, as Mrs Yau is separate
from the owner, Mr Yau, in accounting treatments. (4 marks)

(b) Prudence (or conservatism) concept is violated.

The prudence concept states that revenues and gains are recognised in the profit and loss account only when
they are realised with reasonable certainty, while provision is made for all known expenses and losses, whether
the amount is known with certainty or just an estimate. This practice prevents the reported profits and assets
from being overstated.
Therefore, stock is valued at the lower of cost and net realisable value. If the net realisable value is found to be
lower than the cost, stock should be written down to the lower value. In this case, the historical cost concept
is ignored. (4 marks)

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 QUESTION 2

(A) The balances of the bank statement and the bank account in the cash book seldom agree. Bank reconciliation
statement is prepared to explain the reasons for the difference and to identify any errors and omissions made in
both documents. (2 marks)

(B) (a) Cash Book (Bank)

20X6 $ 20X6 $
(1) Mar 31 Balance c/f 24,275 Mar 31 Balance b/f (balancing figure) 5,894 (1)
(found in the bank reconciliation (iii) Creditor ($5,280 + $5,016) 10,296 (1)
statement) (v) Chung Hwa Ltd: 2,484 (1)
Dishonoured cheque
(vi) Bank charges 862 (1)
(vii) Electricity 4,739 (1)
24,275 24,275
(6 marks)

(b) Bank Reconciliation Statement as at 31 March 20X6

$ $
Adjusted bank balance as per cash book (balancing figure) (24,275) (1)
Add (i) Personal cheque wrongly deposited into bank 1,320 (1)
(ii) Unpresented cheques 11,763 (1) 13,083
(11,192)

Less (iv) Lodgement not yet credited by the bank 3,180 (1)
Overdraft balance as per bank statement (14,372) (1)
(5 marks)

(c) The bank balance to be shown on the balance sheet as at 31 March 20X6 should be $24,275 (overdraft).
(1 mark)

QUESTION 3

(A) The advantages of maintaining control accounts include:

• With a control account for each ledger, it is easier to locate errors.
• With control accounts for the sales ledger and the purchases ledger, it is faster to derive the totals of debtors’
balances and creditors’ balances.
• With ledgers and control accounts being separately prepared by different persons, it is more difficult to make
fraud in the books.
(Or any other acceptable answer.) (3 marks)

(B) (a)
Statement of Revised Total of Sales Ledger Balances as at 31 December 20X5
$ $
Original total of balances 38,253 (1)
Add (iv) Debit total of a debtor’s account undercast 200 (1)
(vii) Debit balance included as a credit balance ($466 × 2) 932 (1) 1,132
39,385
Less (i) Sales understated and entered twice ($628 × 2 –$682) 574 (1)
(ii) Cheque received wrongly debited to debtor’s account ($3,697 + $3,679) 7,376 (1) 7,950
Revised total of balances 31,435 (1)
(6 marks)

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 (b)
Debtors Control
20X5 $ 20X5 $
(1) Dec 31 Balances b/f 30,902 *Dec 31 (iii) Returns inwards 121 (1)
(1) Dec 31 (i) Sales 54 Balances b/f (from (a)) 31,435 (1)
(1) (v) Discounts allowed 600
31,556 31,556
(5 marks)
* The balances before adjustments in the debtors’ control account amounted to $30,902.
Note: Item (vi) should be corrected as:
Dr Bank account $1,280
Cr Bad debts recovered account (or profit and loss account) $1,280
Therefore, this item would not affect the sales ledger or the debtors’ control account.

QUESTION 4

(a)
Statement of Stock Valued as at 31 March 20X6
$ $
Stock as at 31 March 20X5 58,614 (1)
Add (iii) Purchases 73,527 (1)
(vii) Returns inwards ($4,404 x 100/120) 3,670 (2)
(viii) Opening stock undercast 580 (1) 77,777
136,391
Less (ii) Stock scrapped 1,385 (1)
(iv) Sales ($89,028 x 100/120) 74,190 (2)
(vii) Returns outwards 2,784 (1) 78,359
Stock as at 31 March 20X6 58,032 (1)
(10 marks)
(b) Workings:
Cost of stock kept in the warehouse at the night of 1 April 20X6
= $58,032 – $3,985 (i.e. $4,782 × 100/120) – $726
= $53,321 (2)
Stock loss = $53,321 – $8,721 = $44,600
Insurance claim = $44,600 × 30% = $13,380

The Journal
20X6 Dr Cr
$ $
Apr 1 Insurance company 13,380
Profit and loss (Insurance claim) 13,380 (1)
Insurance claimed on stock loss due to flooding. (1)
(4 marks)

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 SECTION B

QUESTION 5

(a) Sakura Limited

Manufacturing, Trading and Profit and Loss Account for the year ended 31 December 20X5
$ $
Opening stock of raw materials 13,712
Add Purchases 1,142,600
Carriage inwards 5,782
1,162,094
Less Closing stock of raw materials 12,560
Cost of raw materials consumed 1,149,534 (2)
Manufacturing wages ($267,590 + $2,800) 270,390 (1)
Prime cost 1,419,924 (1/4)
Factory overhead expenses:
Rent and rates ($304,657 – $7,217) × 25% 74,360 (1)
Repairs to machinery 6,255 (1/4)
Depreciation: Plant and machinery 152,000 (1) 232,615
1,652,539
Add Opening work-in-progress 28,460 (1/4)
1,680,999
Less Closing work-in-progress 27,568 (1/4)
Production cost of goods completed c/d 1,653,431

Sales 2,220,130 (1/4)

Less Cost of goods sold:
Opening stock of finished goods 36,320 (1/4)
Add Production cost of goods completed b/d 1,653,431 (1/4)
1,689,751
Less Closing stock of finished goods 40,124 (1/4) 1,649,627
Gross profit 570,503 (1/4)
Add Discounts received 1,518 (1/4)
Provision for doubtful debts (decrease) 3,776 (1)
575,797
Less Expenses:
Debenture interest 7,500 (1)
Depreciation: Furniture and fixtures 76,500 (1)
Rent and rates 223,080 (1)
Administration expenses 49,320 (1/4)
Carriage outwards 2,852 (1/4)
Bad debts 5,430 (1/4)
Directors’ fee 48,000 (1/4) 412,682
Net profit 163,115 (1/4)
Add Retained profits b/f 63,020 (1/4)
226,135
Less Appropriations:
Transfer to general reserve 13,000 (1/2)
Preference share dividends ($200,000 × 5%) 10,000 (1)
Ordinary share dividends ($6,250 + 250,000 × $0.12) 36,250 (1) 59,250
Retained profits c/f 166,885 (1/2)
(16 marks)

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(b) Sakura Limited
Balance Sheet as at 31 December 20X5
Accumulated Net book
Cost Depreciation value
Fixed Assets $ $ $
Plant and machinery 980,000 (1/4) 372,000 (1) 608,000
Furniture and fixtures 510,000 (1/4) 216,500 (1) 293,500
1,490,000 588,500 901,500
Investments 72,400 (1/2)

Current Assets
Stock: Raw materials 12,560 (1/4)
Work-in-progress 27,568 (1/4)
Finished goods 40,124 (1/4)
Trade debtors 521,400 (1/4)
Less Provision for doubtful debts 10,428 (1) 510,972
Prepaid expenses 7,217 (1/4)
Cash at bank 297,336 (1/4)
895,777
Less Current Liabilities
Trade creditors 387,492 (1/4)
Accrued expenses ($2,800 + $4,500 + $48,000) 55,300 (1) 442,792
Net current assets 452,985 (1/4)
1,426,885

Financed by: Authorized Issued

Share capital $ $
Preference shares of $1 each 500,000 (1/2) 200,000 (1/4)
Ordinary shares of $2 each 1,000,000 (1/2) 700,000 (1)
1,500,000 900,000
Reserves
Retained profits 166,885 (1/4)
General reserve ($39,000 + $13,000) 52,000 (1)
Share premium ($50,000 + 100,000 × $0.25 – $2,000) 73,000 (1)
Proposed dividends ($30,000 + $5,000) 35,000 (1) 326,885
1,226,885
Long-term Liabilities
6% debentures 200,000 (1/2)
1,426,885
(13 marks)

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 QUESTION 6

(a)
Realisation
20X6 $ 20X6 $
(1/2) Apr 30 Premises 1,060,000 Apr 30 Bank: Premises 1,080,000 (1/2)
(1/2) Motor vehicles 37,120 Capital: Cheung (motor vehicles) 16,400 (1/2)
(1/2) Office equipment 25,550 Capital: Lo (motor vehicles) 13,200 (1/2)
(1/2) Goodwill 66,000 Capital: Cheung (office equipment) 12,000 (1/2)
(1/2) Stock 27,620 Bank: Office equipment 10,230 (1/2)
(1/2) Debtors 32,851 Capital: Lo (stock) 8,286 (1)
(1/2) Bank: Dissolution expenses 12,600 Bank: Stock 10,060 (1/2)
Capital: Cheung (debtors) 34,400 (1)
Creditors: Discounts received 5,280 (1)
Loss from realisation:
Capital: Cheung 28,754 (1/2)
Capital: Poon 28,754 (1/2)
Capital: Lo 14,377 71,885 (1/2)
1,261,741 1,261,741
(11 marks)

(b)
Bank
20X6 $ 20X6 $
(1) Apr 30 Cash 2,138 Apr 30 Balance b/f 10,230 (1/2)
(1/2) Realisation: Realisation:
(1/2) Premises 1,080,000 Dissolution expenses 12,600 (1/2)
(1/2) Office equipment 10,230 Creditors 24,030 (1/2)
(1/2) Stock 10,060 Settlement:
(1/2) Capital: Poon 500 Capital: Cheung 806,435 (1/2)
Capital: Lo 249,633 (1/2)
1,102,928 1,102,928
(6 marks)

(c)
Capital
Cheung Poon Lo Cheung Poon Lo
20X6 $ $ $ 20X6 $ $ $
(1/2) Apr 30 Current 174,326 Apr 30 Bal b/f 540,000 200,000 180,000 (11/2)
Realisation: Current 129,709 106,356 (1)
Motor Loan: Cheung 230,000 (1)
(1) vehicles 16,400 13,200 Bank 500 (1/2)
Office Capital: Poon 1,720 (1)
(1/2) equipment 12,000 Capital: Lo 860 (1)
(1/2) Stock 8,286
(1/2) Debtors 34,400
Loss from
(11/2 ) realisation 28,754 28,754 14,377
(1/2) Capital: Poon 1,720 860
(1) Bank 806,435 249,633
899,709 203,080 286,356 899,709 203,080 286,356
(12 marks)

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QUESTION 7

(a)
The Journal
Dr Cr
$ $
(i) Discounts allowed (Profit and loss) 1,270 (1/2)
Suspense 1,270 (1/2)

(ii) Sales (Trading) 16,240 (1/2)

Disposal 16,240
Disposal 36,000
Office equipment 36,000 (1/2)
Provision for depreciation: Office equipment 7,200 (1/4)
Profit and loss ($36,000 × 20%) 7,200 (1/4)
Provision for depreciation: Office equipment 21,600 (1/4)
Disposal ($28,800 – $7,200) 21,600
Disposal 1,840
Profit and loss: Profit from disposal 1,840 (1/4)

Alternative answer:
Sales (Trading) 16,240
Provision for depreciation: office equipment 28,800
Office equipment 36,000
Profit and loss 9,040

(iii) Suspense 1,820 (1/2)

Rent and rates (Profit and loss) 1,820 (1/2)
Suspense 4,840 (1)

(iv) Drawings 1,270 (1/2)

Insurance (Profit and loss) 1,270 (1/2)

(v) Bank 3,163 (1/2)

Bad debts recovered (Profit and loss) 3,163 (1/2)

(vi) Bad debts (Profit and loss) 1,140 (1/2)

Debtors 1,140 (1/2)
Profit and loss 32 (1/2)
Provision for doubtful debts 32 (1/2)

(vii) Trading 1,360 (1/2)

Stock 1,360 (1/2)

(viii) Drawings 2,360 (1/2)

Bank charges (Profit and loss) 2,360 (1/2)

(ix) Rose Ltd 270 (1/2)

Suspense 270 (1/2)
Rose Ltd (in purchases ledger) 2,749 (1/2)
Rose Ltd (in sales ledger) 2,749 (1/2)

(x) Suspense 1,890 (1/2)

Sunny Ltd 1,890 (1/2)
(14 marks)

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 (b)
Suspense
$ $
(1/2) Balance b/f (balancing figure) 2,670 (i) Discounts allowed 1,270 (1/2)
(1/2) (iii) Rent and rates (accrued) 1,820 (iii) Rent and rates (prepaid) 4,840 (1/2)
(1/2) (x) Sunny Ltd 1,890 (ix) Rose Ltd 270 (1/2)
6,380 6,380
(3 marks)

(c) Statement of Revised Net Profit for the year ended 30 September 20X5
$ $
Original net profit 68,437
Add (ii) Depreciation overstated 7,200 (1)
Profit from disposal omitted 1,840 (1)
(iii) Rent and rates overstated 1,820 (1)
(iv) Insurance overstated 1,270 (1)
(v) Bad debt recovered omitted 3,163 (1)
(viii) Bank charges overstated 2,360 (1) 17,653
86,090
Less (i) Discounts allowed undercast 1,270 (1)
(ii) Sales overstated 16,240 (1)
(vi) Bad debts omitted 1,140 (1)
Increase in provision for doubtful debts 32 (1)
(vii) Closing stock overcast 1,360 (1) 20,042
Revised net profit 66,048 (1)
(12 marks)

168