4E Damai PRELIMS 2022 P1 - Solutions

Secondary 4 Express Preliminary Examinations 2022 – Mark Scheme and Solutions for Paper 1 Answer all questions 1 Osmond runs a textile business with a financial year end of 31 March. He has provided the following information about the business’ motor vehicles. Motor vehicles account Date Particulars Debit Credit Balance 2019 $ $ $ Apr 1 Balance b/d 80 000 Dr 2020 Jan 1 Trade payable – Ozark Motors 45 000 125 000 Dr 2020 Apr 1 Balance b/d 125 000 Dr Accumulated depreciation – motor vehicles account Date Particulars Debit Credit Balance 2019 $ $ $ Apr 1 Balance b/d 16 000 Cr 2020 Mar 31 Depreciation of motor vehicles ? REQUIRED (a) Interpret the entry on 1 January 2020 in the motor vehicles account. On 1 January 2020, the business bought motor vehicles $45,000 on credit from trade payable Ozark Motors. [1] [1] (b) Calculate the depreciation expense for the year ended 31 March 2020 given that the business provides depreciation at a rate of 20% per annum on net book value. Depreciation for old motor vehicles = ($80,000-$16000) x 20% = $12,800 [0.5] Depreciation for new motor vehicles = $45,000 x 20% [0.5] x 3/12 [1] = $2,250 Depreciation expense for 31 March 2020 = $12,800 + $2,250 = $15,050 [1/OF]

2 [3] On 18 March 2020, Osmond purchased cutting equipment from Cutty Trading and incurred the following amounts. $ Payment by Cost of cutting equipment 23 000 On credit Delivery fee to transport cutting equipment 300 Cheque Installation of cutting equipment 200 Cheque Electricity to run cutting equipment 700 Bank transfer Replacement of faulty screws on the cutting equipment 20 Cash REQUIRED (c) Prepare the equipment account for the month of March 2020 to record the purchase on 18 March 2020. This is the business’ first equipment purchase. Equipment account Date Particulars Debit $ Credit $ Balance $ 2020 Mar 18 Trade payable – Cutty Trading 23,000 [1] 23,000 Dr Cash at bank ($300+$200) 500 [1] 23,500 Dr Apr 1 Balance b/d [1] 23,500 Dr $20 is insignificant to decision -making hence, revenue expenditure [3] [Total: 7]

3 2 Nadine sells shoes. She has provided the following information relating to her business for the year ended 31 March 2022. $ Premises 132 300 Trade payables 11 000 Inventory 23 450 Capital 144 610 Sales revenue 46 000 Loan to employee 8 000 Cost of sales 7 300 Cash at bank (overdraft) 5 000 Drawings 360 General expenses 2 200 Trade receivables ? REQUIRED (a) Use the expanded accounting equation to calculate trade receivables. Assets = Liabilities+Capital+(Income-Expenses)-Drawings [1] $163,750+Trade receivables = $16,000+$144,610+36,500-$360 [0.5] Trade receivables = $196,750-$163,750 = $33,000 [1] Assets = Premises+Inventory+Loan to employee+Trade receivables = $132,300+$23,450+$8,000+Trade receivables = $163,750 [1] + Trade receivables Liabilities = Trade payables+Bank overdraft = $11,000+$5,000 = $16,000 [0.5] Profit/(Loss) = Income – Expenses = Sales revenue-Cost of sales-General expenses

4 = $46,000-$7,300-$2,200 = $36,500 [1] [5] (b) State and explain the type of business Nadine is operating. Nadine is operating a trading business [1] which buys goods and sells them to customers to earn an income [1]. [2] (c) Explain two reasons for a business’ owner’s equity to decrease over the year. Business made a loss for the year. [1] Owner took drawings during the year. [1] [2] Asher is one of Nadine’s business competitors. The following information is provided by both businesses for the two years ended 31 March 2021 and 31 March 2022. Nadine’s Business Asher’s Business 31 March 2021 31 March 2022 31 March 2021 31 March 2022 Rate of inventory turnover 6.21 times 8.91 times 5.23 times 6.55 times REQUIRED (d) Evaluate the rate of inventory turnover for both businesses for both years. Nadine’s rate of inventory turnover has improved from 6.21 times in 2021 to 8.91 times in 2022 [1]. This could be due to Nadine selling inventory faster by reducing selling price for slow-moving items or attracting more customers through marketing campaigns [1].

5 Asher’s rate of inventory turnover has also improved from 5.23 times in 2021 to 6.55 times in 2022 [1]. This could be due to Asher selling inventory faster by reducing selling price for slow-moving items or attracting more customers through marketing campaigns [1]. Overall, Nadine has a better rate of inventory turnover for both years as compared to Asher [1]. This shows that Nadine is more efficient in inventory management than Asher [1]. Award marks if students include day sales in inventory, 1 mark for each point. [6] [Total: 15] 3 Sue owns a medical supplies business. She discovered the following errors in the business’ financial statements for the year ended 31 December 2021. 1 A credit sale, $5 000, to Shanice had been posted to the account of Shernice. 2 Equipment repairs of $300 were posted to the equipment account. REQUIRED (a) Prepare the journal entries to correct errors 1 and 2. Debit $ Credit $ Error 1 Trade receivable – Shanice 5,000 Trade receivable - Shernice 5,000 [1] Correction of error – credit sale $5,000 to Shanice posted wrongly to Shernice. [1] Error 2 Equipment repairs 300 Equipment 300 [1]

6 Correction of error – equipment repairs $300 wrongly posted to Equipment account. [1] [4] (b) Complete the following table by placing a tick (✓) to show the effect of errors 1 and 2 on the profit before correction. Overstated Understated No effect Error 1 ✓ [1] Error 2 ✓ [1] [2]

7 (c) For each of the following transaction, identify the source document used to record the information. Transaction Source Document (i) Sold medical supplies on credit. Invoice issued [0.5] (ii) Sue informed Tom, a credit customer, that he has been undercharged. Debit noted issued [0.5] (iii) Received cash for medical supplies sold. Receipt issued [0.5] (iv) Purchased a printer on credit. Invoice received [0.5] [2] (d) Use an accounting theory to explain the importance of source documents. According to the objectivity theory [0.5], accounting information recorded must be supported by reliable and verifiable evidence [1] so that financial statements are free from opinions and biases [0.5]. [2] [Total: 10]

8 4 Ralph is a credit customer of Lauren. Ralph is entitled to a trade discount of 10% on all purchases and a cash discount of 5% if invoices are fully paid within 7 days. On 1 January 2021, the balance owed by Ralph is $10 670. Lauren had the following transactions during January 2021. January 9 Ralph purchased goods with a list price of $5 000. The cost of the goods is $1 000. 13 Ralph fully settled his account by cheque. REQUIRED (a) Prepare journal entries to record the above transactions in the books of Lauren. Narrations are not required. Lauren Journal Date Particulars Debit $ Credit $ 2021 Jan 9 Trade receivable – Ralph (90% x $5,000) [0.5] 4,500 Sales revenue [1] 4,500 Cost of sales 1,000 Inventory [1] 1,000 13 Cash at bank [$10,670 [0.5] +($4,500x95%) [0.5] 14,945 Discount allowed (5%x$4,500) [0.5] 225 Trade receivable – Ralph [1] 15,170 [5]

9 (b) State one reason why Lauren is offering a trade discount to Ralph. To encourage bulk purchase, loyalty, patronage. [1] (c) Explain why Ralph buys goods on credit instead of paying for them immediately. By not paying cash immediately, Ralph is able to us