YCKSS 4E Mid Year 2015 Paper 1 Solution

1(a) Explain the difference between Capital expenditure and Revenue expenditure [4]

Capital expenditure:

Cost of buying fixed assets and all expenditures to bring the fixed assets to a ready to use condition, which can be used for more than one accounting period. √√√√

Revenue expenditure:

Payment for expenses or cost to maintain fixed assets in a working condition, which are used up within one accounting period. √√√√

(b) Advise Faris if he should classify the cost of extension his shop premises as Capital expenditure or Revenue expenditure. Explain. [2]

Capital expenditure √√

The cost of extension adds value to the existing shop premises. √√

OR The amount $48 500 is significant to the business.

(c) State the effect of the above transaction on the following; i.e. write “increase”, “decrease” or “no effect”.(i) Profit for the year [1]

Profit for the year will decrease by $2 000. √√

(ii) Balance sheet [1]

Current assets (cash at bank) will decrease by $2 000. √√[Total: 8]

2(a) Explain the meaning of:

(i) Direct debits [2]

Business instructs the bank to pay direct to the creditor’s bank account from the business bank account. √√√√

(ii) Credit transfers. [2]

Business receives money into its bank account through transfer from debtor’s bank account. √√√√

(b) State one purpose of preparing a bank reconciliation statement. [1]

To reconcile the difference between the cash book and bank statement balances.√√

2

(c) Prepare an updated Cash Book as at 31 March 2015. Bring down the new balance to 1 April 2015. [4]

Cash at bank accountDate Particulars Dr

$Cr$

Balance$

2015

Mar 31 Balance b/d 850 Cr √√

31 Insurance expense 480 1 330 Cr √√

31 Dividend income 1 500 170 Dr √√

Apr 1 Balance b/d 170 Dr √√

(d) Prepare a statement, appropriately headed, which reconciles the balances between the amended Cash Book and the Bank Statement at 31 March 2015. [4]

Bank Reconciliation Statement as at 31 March 2015 √

Balance as per bank statement $800 √√

Add: Uncredited deposit - Marley 650 √√

Less: Unpresented cheque – F&B Ltd (1 280) √√

Balance as per updated cash book 170 √

OR

Bank Reconciliation Statement as at 31 March 2015 √

Balance as per updated cash book $170 √

Add: Unpresented cheque – F&B Ltd 1 280 √√

Less: Uncredited deposit - Marley (650) √√

Balance as per bank staement 800 √√

[Total: 13]

3

3(a) Calculate the following:

(i) Cost of sales for the year ended 31 January 2015. [2]

Cost of sales = 12 000 + 19 500 + 32 500 = $64 000 √√√√

(ii) Prepare the inventory account for the year ended 31 Jan 2015. [6]

Inventory accountDate Particulars Dr

$Cr$

Balance$

2014

Feb 1 Balance b/d 12 000 Dr √√

Apr 30 Trade payables 19 500 31 500 Dr √√

Aug 31 Trade payables 32 500 64 000 Dr √√

Nov 30 Trade payables 63 000 127 000 Dr √√

2015

Jan 31 Cost of sales 64 000 63 000 Dr √√

Feb 1 Balance b/d 63 000 Dr √√

(iii) Prepare an extract of the income statement showing sales revenue, cost of sales and gross profit for the year ending 31 January 2015. [3]

Income statement for the year ended 31 January 2015 (Extract)

Sales revenue $164 000 √√

Less: Cost of sales (64 000) √√

Gross profit 100 000 √√

[Total: 11]

4

4

(a) Show the entries in the General Journal of Rick to correct each of the errors (narratives are not required). [4]

General JournalDate Particulars Debit Credit

2015 $ $

Mar 31 Trade payables Maxim 100 √√

Trade payables Marcus 100 √√

Mar 31 Sales revenue 20 √√

Trade receivables Krisnan 20 √√

(b) Name the type of error in each case. [2]

Error Type of Error(i) Error of commission √√

(ii) Error of original entry √√

(c) State two other errors not revealed by the Trial Balance. [2]

Error of omission Error of principle Error of reversal Compensating error

√√√√ Any 2

[Total: 8]

5

YCKSS 4E Mid Year 2015 Paper 2 Solution

1(a)Price Ltd

Income Statement for the year ended 31 March 2015

$ $

Sales revenue 646 000 √

Less: Sales returns (3 000) √

Net sales revenue 643 000

Less: Cost of sales (407 000) √

Gross profit 236 000 √

Add: Other income

Discount received 4 500 √

240 500

Less: Expenses

Insurance (+2 000) 20 000 √√

Stationery (+50) 950 √√

General expenses (-600) 16 000 √√

Wages and salaries 76 400 √

Electricity 8 000 √

Depreciation on motor vehicle (10%x19 800)

1 980 √√

Impairment loss on trade receivables [2 100 – (2 200 – 300)]

200 √√√√

(123 530)

Profit for the period 116 970 √

10 marks

6

(b)Price Ltd

Balance Sheet as at 31 March 2015

$ $ $

Non-current assets Cost Accumulated depreciation

Net book value

Property 500 000 √

Motor vehicle 33 000 (15 180) 17 820 √√√

517 820

Current assets

Trade receivables (-300) 52 700 √√

Less: Allowance for impairment of trade receivables

(2 100) √√

Net trade receivables 50 600

Inventory 64 400

Cash at bank (-50) 9 450 √√

Prepaid general expenses 600 √√

125 050

Total assets 642 870

Shareholders’ equity

Issued share capital, 400 000 shares 400 000 √

Retained earnings * 141 870

541 870

Current liabilities

Trade payables 39 000

Accrued insurance 2 000 √√

Dividends payable 60 000 √√

101 000

Total equities and liabilities 642 870

* Retained earnings = Opening balance + Profit for the period – Dividends declared

= 84 900 + 116 970 – ($0.15 x 400 000) = $141 870 √√√

7

10 marks2(a)

MachineryDate Particulars Dr

$Cr$

Balance$

2014

Jan 1 Balance b/d 85 000 Dr √

May 15 Sale of non-current assets 50 000 35 000 Dr √√

May 15 Other payables, Susuki Motors 75 000 110 000 Dr √√

Apr 1 Balance b/d 110 000 Dr √

3 marks

Accumulated depreciation for machineryDate Particulars Dr

$Cr$

Balance$

2014

Jan 1 Balance b/d 20 000 Cr √

May 15 Sale of non-current assets* 18 000 2 000 Cr √

Dec 31 Depreciation of machinery** 21 600 23 600 Cr √

Apr 1 Balance b/d 23 600 Cr √

* Accumulated depreciation of disposed machineryDepreciation for year ended 31 Dec 2012 = 20% x (50 000 – 0) = $10 000 √√Depreciation for year ended 31 Dec 2013 = 20% x (50 000 – 10 000) = $8 000 √√Depreciation for year ended 31 Dec 2014 = 0Accumulated depreciation = $18 000

** Depreciation for year ended 31 Dec 2014Machine 1 (disposed) Machine 2 (old/remain) Machine 3 (new)

Cost $50 000 $35 000 $75 000Provision for depreciation (1 Jan 2014)

$18 000 $2 000 Nil

Depreciation for year ended 31 Dec 2014

Nil 20% x (35 000 – 2 000)= $6 600 √√

20% x (75 000 – 0)= $15 000 √√

8

6 marksSale of non-current assets

Date Particulars Dr$

Cr$

Balance$

2014

May 15 Machinery 50 000 50 000 Dr √√

May 15 Accumulated depreciation for machinery

18 000 32 000 Dr √√

May 15 Cash at bank 27 500 4 500 Dr √√

Dec 31 Profit and loss 4 500 0 √√

4 marks(b) Matching concept √√

The income earned from using the non-current assets is matched with the depreciation expense charged during the accounting period. √√

2 marks

3(a)

Current ratio = = √√

= = 1.88 : 1 √√

Quick ratio = = √√

= = 0.75 : 1 √√

4 marks(b) Any 4 reasons

Working capital ratio of 1.88:1 is below the ideal ratio of 2:1. Reasons could be:

Owings to creditors is high Bank loan due next year Insufficient cash holding

Quick ratio of 0.75:1 indicates that business is unable to pay short term debts. Reasons could be:

9

Holding excessive stocks, which the business may not be able to sell at a reasonable price within a short time

High prepaid expenses

4 marks

(c) Any 2 waysTo improve on business’ liquidity:

Loan from bank Owner invests more cash as additional capital Sell off excess non-current assets

2 marks

4(a)Commission income

Date Particulars Dr$

Cr$

Balance$

2014

Apr 1 Commission income receivable 1 580 1 580 Dr √√

2015

Mar 31 Cash at bank 12 790 11 210 Cr √√

Mar 31 Commission income received in advance

3 000 8 210 Cr √√

Mar 31 Profit and loss 8 210 0 √√

4 marks

Wages expensesDate Particulars Dr

$Cr$

Balance$

2014

Apr 1 Prepaid wages 1 320 1 320 Dr √√

2015

Mar 31 Cash at bank 38 800 40 120 Dr √√

10

Mar 31 Accrued wages 1 880 42 000 Dr √√

Mar 31 Profit and loss 42 000 0 √√

4 marks

Allowance for impairment of trade receivablesDate Particulars Dr

$Cr$

Balance$

2014

Apr 1 Balance b/d 230 Cr √√

2015

Mar 31 Trade receivables 500 270 Dr √√

Mar 31 Impairment loss on trade receivables

720 450 Cr √√√√

Apr 1 Balance b/d 450 Cr √√

5 marks

(b) Accrual concept √√

Expense or income is recognised when they are incurred or earned, regardless of the amount paid or received. √√

2 marks