2023 O Level 7087 Answer

Suggested Solution O-Level 2023 Principles of Accounts Paper 1 Q1(a)  A business buys sufficient goods to keep on hand to prevent a stock -out situation, which often results in loss of sales.  However, if the business buys too much goods, it will incur higher storage costs and increase the risk of the goods becoming obsolete. (b)  Keep proper computerised records to track changes in inventory balances using the perpetual inventory system so that the quantity of inventories are updated on a continuous basis to avoid buying too little or too many goods.  Keep inventories in the shops and warehouse to avoid stock-out situation.  Buy insurance to insure the inventory against risks of potential loss caused by damaged goods. Insurance claims are then made to seek compensation. (c) (i) 18 Aug 2023 – The business purchased goods worth $3 700 on credit from Handy Co. (ii) 22 Aug 2023 – Customer return goods costing $2 200. (iii) 27 Aug 2023 – The owner withdrew goods worth $180 for his personal use. (d) Profit will be overstated by $400 [Total: 8]

Q2 (a) Trade discount is reduction to the list price. (b) To encourage:  customers to buy in bulk  customer patronage  customer loyalty (c) Journal Date Particulars Debit Credit 2023 $ $ Mar 11 Cash at bank (98% x 5 700) 5 586 Discount allowed (2% x 5 700) 114 Trade receivable – Ahmed 5 700 (d) Bank loan Bank overdraft Amount of borrowing Amount borrowed is fixed. Amount borrowed is not fixed but it must not exceed limit agreed with the bank. Transference of cash Cash is transferred to the business. No cash is transferred to the business. Business withdrew more than what is deposited in its bank account. Repayment Usually regular fixed cash repayments to reduce the amount borrowed. Sometimes the business is allowed to pay off entire amount only at the end of loan period. No cash repayment. Any deposit into the bank account reduces the amount borrowed. Double entry recording Loan from bank account is credited Reflected as a credit balance of the cash at bank account Classification in statement of financial position Shown as long term borrowing under non-current liabilities. Shown as bank overdraft under current liabilities. [Total: 10]

Q3 (a) No effect Amount of increase $ Amount of decrease $ $ Profit for the year before correction of errors 26 270 Error 1 800 Error 2 150 Error 3 ✔ Error 4 10 000 Adjusted profit for the year 15 620 (b) The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business. (c) Account to be debited Account to be credited Income summary Capital (d) (i) Being straightforward and honest in all professional and business relationships (ii) Not letting bias, conflict of interest or undue influence of others override professional judgement. [Total: 11]

Q4 (a) JKL Bikes Pte Ltd Statement of Financial Position as at 30 September 2023 (extract) $ $ Shareholder’s Equity Share capital, 350 000 ordinary shares 437 500 Retained earnings* (385 000 + 42 000 – 350 000X$0.05) 409 500 Total equity 847 000 (b) Return on equity = Profit for the year / average equity* = 42 000 / 741 000 X 100 = 5.67 % (2 dp) *Average equity = (Beginning equity + Ending equity )/2 = (250 000 + 385 000 + 847 000 )/2 = 741 000 (c) Let JKL be JKL Bikes Pte Ltd and SCC be SuperCycles Co  The gross profit margin of JKL 49.35% is better than SCC’s 42.38%.  This means that JKL is selling its products at a higher price or sourcing its goods at a lower cost.  However, the profit margin of JKL 22.14% is slightly worse than SCC’s 23.54%.  This shows that JKL is better at trading goods but less efficient in managing its expenses.  In addition, the return on equity of JKL 5.67% is also slightly worse than SCC’s 6.52%  Overall, JKL is less profitable than SCC. [Total: 11]

Suggested Solution O-Level 2023 Principles of Accounts Paper 2 1(a) Yong Statement of Financial Performance for the year ended 31 December 2022 $ $ Sales revenue 232 500 Less: Sales returns 14 950 Net sales revenue 217 550 Less: Cost of sales 123 200 Gross profit 94 350 Other income Gain on sale of non-current assets 3 600 Less: Other Expenses Wages and salaries (31 000 + 2 800) 33 800 Rent expense 12 000 Insurance expense (8 500 – 1 500) 7 000 General expense 9 800 Depreciation on fixtures and fittings (15% x 125 000) 18 750 Depreciation on motor vehicles [20% x (30 000 – 6 000)] 4 800 Interest expense (5% x 25 000) 1 250 Reversal of impairment loss on trade receivables [(4% x 38 400) – 2 200 (664) 86 736 Profit for the year 11 214 [10] 1(b) Yong Statement of Financial Position as at 31 December 2022 Assets $ $ $ Non-current assets Cost Accumulated Depreciation Net book value Fixtures and fittings (37 500 + 18 750) 125 000 56 250 68 750 Motor vehicles (6 000 + 4 800) 30 000 10 800 19 200 87 950 Current assets Trade receivables 38 400 Less: Allowance for impairment of trade receivables (4% x 38 400) 1 536 36 864 Inventory 47 400 Cash at bank 2 300 Prepaid insurance 1 500 88 064 Total assets 176 014 Equity and Liabilities Owner’s Equity Capital (133 750 – 22 000 +11 214) 122 964 Non-current liabilities Long term borrowings (25 000 -5 000) 20 000 Current liabilities Trade payables 24 000 Current portion of long term borrowings 5 000 Interest expense payable 1 250 Wages and salaries payable 2 800 33 050 Total equity and liabilities 176 014

Q2 (a) Any three of the following a. Obsolescence b. Wear and tear (b) Business might apply straight-line method when the non-current asset is expected to earn income evenly over its useful life. (c) Journal 2023 Particulars Dr $ Cr $ Jun 1 Sale of non-current asset 8 200 Equipment 8 200 Jun 1 Accumulated depreciation (8 200-200)/ 4 years) 2 000 Sale of non-current asset 2 000 Jun 1 Cash in hand 5 600 Sale of non-current asset 5 600 (d) Net book value = $8 200 – $2 000 = $6 200 Loss on sale of motor vehicle = $5 600 – $6 200 = $600 [Total: 12]

Q3 (a) (i) 12 Jun 2022 – The debt of $2 200 owed by credit customer YoYo Co was written off. (ii) 31 Mar 2023 – The business made an increase in allowance for impair ment of trade receivables by $3 400. (b) With reference to the prudence theory , t he allowance for impairment of trade receivables is reported in the statement of financial position as a deduction against the trade receivables book value to ensure that the trade receivables balance is not overstated. OR With reference to the matching theory , as the increase in allowance for impairment of trade receivables is a likely expense, it should be recorded in the same accounting year as the sales revenue earned to obtain a true and fair profit for the year. [Total: 14] (c) Trade receivables collection period = *Average net trade receivables / Net credit sales revenue x 365 days = 89 600/ 895 000 X 365 days = 36.54 days *Average net trade receivables = (77 900 + 101 300)/2 = 89 600 (d)  Tuti’s trade receivables collection period worsen from 29.85 days in 2021 to 32.27 days in 2022 to 36.54 days in 2023.  This means that in 2023, the business was collecting payment from its credit customers on a less timely basis than the previous years 2021, 2022  and taking a longer time to collect payment from its credit customers over the