4E Damai PRELIMS 2022 P2 - Solutions

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 1 1a) White House Pte Ltd [0.5] Statement of financial performance for the year ended 31 October 2021 [0.5] $ $ Sales revenue $90,000-(96%x$3,000) [0.5] 87,120 Less: Sales returns (4,000) Net sales revenue 83,120 Less: Cost of sales (22,000) Gross profit 61,120 Add: Other income Rent income ($11,000-$5,00) [0.5] 10,500 [0.5] Commission income 700 [0.5] Total other income 11,200 Total income 72,320 [0.5] Less: Other expenses General expenses $2,000-(2/5x$150) [0.5] 1,940 [0.5] Salaries ($80,900+$3,300) [0.5] 84,200 [0.5] Loan interest expense 1,800 [0.5] Impairment loss on inventory (50%x$7,000) [0.5] 3,500 [0.5] Impairment loss on trade receivables (reversal) ($12,000x5%)- (5,000-2,000) [0.5] (2400) [0.5] Depreciation of motor vehicles ($55,000-$11,000)x10% [0.5] 4,400 [0.5] Depreciation of fixtures and fittings ($12,000/5 years) [0.5] 2,400 [0.5] Total other expenses (95,840) Loss for the year (23,520)

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 2 1b) White House Pte Ltd Statement of financial position as at 31 October 2021 $ $ $ Assets Cost Accumulated Depreciation Net Book Value Non-current assets Motor vehicles 55,000 (15,400) (11,000+4,400) 39,600 Fixtures and fittings 12,000 (4,400) (2,000+2,400) 7,600 Land 140,000 - 140,000 Total non-current assets 207,000 (19,800) 187,200 [1] Current assets Inventory ($28,670-$7,000) [0.5] 21,670 Trade receivables ($14,000-$2,000) [0.5] 12,000 Less: Allowance for impairment of trade receivables ($12,000x5%) [0.5] (600) Net trade receivables 11,400 [0.5] Cash at bank ($14,000+$50,000) [0.5] 64,000 Prepaid general expense (2/5x$150) [0.5] 60 Commission income receivable 700 Insurance claim receivable (50%x$7,000) [0.5] 3,500 Total current assets 101,330 Total assets 288,530 Equity and Liabilities Shareholders’ equity [0.5] Share capital, 200,000 ordinary shares [0.5] 200,000 Retained earnings ($36,070-$23,520 [0.5]- ($0.05x200,000 shares)) [0.5] 2,550 Total equity 202,550 Non-current liabilities Long-term borrowings ($60,000x5/6)) 50,000 [0.5] Total non-current liabilities 50,000 Current liabilities Current portion of long-term borrowings($60,000x1/6) 10,000 [0.5] Salaries payable 3,300 [0.5] Rent income received in advance 500 [0.5] Loan interest expense payable 1,800 [0.5] Dividends payable ($0.05x200,000) 10,000 [0.5] Trade payables ($7,500+(96%x$3,000)) [0.5] 10,380 Total current liabilities 35,980 Total equity and liabilities 288,530

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 3 2a) Lois Journal Date Particulars Debit Credit 2021 $ $ Jan 1 Rent income 1,200 Rent income receivable [1] 1,200 Dec 31 Cash at bank 19,000 Rent income [1] 19,000 Rent income 1,500 Rent income received in advance [1] 1,500 Rent income (-$1,200+$19,000-$1,500) 16,300 Income summary [1] 16,300 2b) Advertising expense incurred for year ended 31 December 2021 = -$400 [0.5] + $8,800 [0.5] - $600 [0.5] = $7,800 [0.5] 2c) Lois Journal Date Particulars Debit Credit 2021 $ $ Mar 16 Cash at bank ($0.70x$3,000) 2,100 Allowance for impairment of trade receivables ($0.30x$3,000) 900 Trade receivables – Michelle Trading 3,000 [marks only awarded if entry is fully correct] [2] 2d) Rate of trade receivables turnover = Net credit sales revenue/Average net trade receivables [0.5] = $690,000 [0.5] / $88,200 [0.5] = 7.82 times [0.5] Average net trade receivables = ($100,000-$2,000)+($80,000-$1,600) / 2 = $88,200

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 4 2e) The business rate of trade receivables turnover improved from 6.80 times in 2020 to 7.82 times in 2021. [1] This can also be seen from an improvement of the trade receivables collection period from 53.67 days (365 days/6.80 times) in 2020 to 43.80 days [($88,200/$690,000)x365 days] in 2021. [2] This means that it was collecting payment from its credit customers on a more timely basis/taking a shorter time to collect money from its trade receivables in 2021 than in 2020. [1] Hence, the business has become more efficient at managing its trade receivables over the two years. [1]

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 5 3a) On 30 November 2021, the business issued share capital $100,000 which was fully paid up. [1] 3b) Inventory Date Particulars Debit Credit Balance 2022 $ $ $ Apr 1 Balance b/d [0.5] 2,000 Dr 10 Trade payable – Cece Trading [0.5] 5,000 7,000 Dr 12 Cost of sales [1] 7,000 - 25 Trade payable – Cece Trading [0.5] 3,500 3,500 Dr May 1 Balance b/d [0.5] 3,500 Dr 3c) Current ratio = Total current assets/Total current liabilities 2021 = ($33,000+$32,120+$43,500)/($4,600+$$27,000) = $108,620/$31,600 = 3.44 [1] 2022 = ($36,000+$38,900)/($10,800+$14,000+$53,000) = $74,900/$77,800 = 0.96 [1] 3d) Quick ratio = Total current assets – Inventory – Prepayments / Total current liabilities 2021 = $108,620-$32,120 / $31,600 = 2.42 [1] 2022 = $74,900-$38,900 / $77,800 = 0.46 [1]

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 6 3e) [1 mark each for any 6 points] 1 The current ratio has worsened from 5.97 in 2020 to 3.44 in 2021 to 0.96 in 2022. 2 In the first two years, the current ratio was above the general benchmark of 2. However, in 2022, it fell below the general benchmark of 2 which could mean that the business may have trouble paying its short-term debts using its current assets. 3 The quick ratio has worsened from 5.45 in 2020 to 2.42 in 2021 to 0.46 in 2022. 4 In the first two years, the quick ratio was above the general benchmark of 1. However, in 2022, it fell below the general benchmark of 1 which could mean that the business may not be able to pay its short-term debts using quick assets where they fall due. 5 The business trade receivables have increased from $25,460 in 2020 to $33,000 in 2021 to $36,000 in 2022. This means that that the business may be facing difficulty in collecting cash from its trade receivables and therefore has less liquid resources for i mmediate payments. 6 Its trade payables have increased from $18,000 in 2020 to $$27,000 in 2021 to $53,000 in 2022. This means that the business is having difficulty in paying off its debts due to insufficient cash as seen from its bank overdraft balance in 2022. 7 Difficulty in paying off its trade payables may result in the business’ inability to obtain credit or affect its relationship with suppliers. 8 Its rent payable has increased from $3,000 in 2020 to $4,600 in 2021 to $14,000 in 2022. This means that the business has difficulty in paying for its operational expenses. 9 Difficulty in paying off its rent expenses may result in the business being evicted from its place of business. 3f) [1 mark each for any 2 points] 1 Increase sources of cash by obtaining cash contributions from owners/shareholders. 2 Obtain long-term loan. 3 Sell excess non-current assets for cash. 4 Manage cash outflow by reducing operating expenses, negotiating for better credit terms from suppliers.

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 2 7 4a) Decision: Fei should buy Hammer Strength. [1] Basic Statement/Evidence Development 1 Has a longer warranty period of 2 years as compared to Pro Muscle which has 1 year. A longer warranty period means that repairs costs would be covered by the supplier. This reduces repair expenses over a longer period, increasing profit. 2 Payment