2021 O Level 7087 Answer

Suggested Solution O-Level 2021 Principles of Accounts Paper 1 Q1 (a) On 1 July 2019, Xu’s business took a bank loan of $40 000. [1] On 30 June 2020, Xu’s business repaid $8 000 of the bank loan by cheque. [1] (b) On 1 January 2020, Xu’s business r eversed the entry of interest expense incurred in the year ended 31 Dec 2019 but not paid. [1] On 30 June 2020, Xu’s business paid $2 400 interest by cheque. [1] (c) Extract of Statement of Financial Performance for the year ended 31 December 2020 Less: Expenses $ Interest expense 2160 [1] (d) Extract of Statement of Financial Position as at 31 December 2020 Non-current liabilities $ $ Long term borrowing 24 000 [1] Current liabilities Current portion of long term borrowing 8 000 [1] Interest payable 960 [1] 8 960 (e) One difference between loan and overdraft:  The amount borrowed is fixed in a bank loan but the amount borrowed for an overdraft is not fixed but it must not exceed the limit agreed with the bank.  Cash is transferred to the business for a bank loan but no cash is transferred to the business for an overdraft. Instead, the overdraft is due to the business withdrawing more than its bank balance.  Bank loan usually requires regular fixed cash repayment but bank overdraf t does not involve cash repayment. Any deposit into the bank account reduces the overdraft.  Bank loan is presented as long term borrowing under non-current liabilities but bank overdraft is recorded as a current liability. [2] (f) Accrual basis of accounting [1] Interest expense should be recognised in the financial period incurred whether or not it has been paid. [1] [Total: 12]

Q2 (a) Assets are resources a business owns or controls that are expected to generate future benefits. [1] Liabilities are obligations owed by a business to others that are expected to be settled in the future. [1] Income is the earnings from selling goods or providing services. [1] Expense are costs incurred to earn income in the same accounting period. [1] (b) Assets = Liabilities + Equity [1] = 7 800 + 1 200 + 10 000 + 50 000 + 80 000 = 149 000 [1] Net book value of non-current assets = 149 000 – 13 500 – 12 000 = $123 500 [1] (c) The consistency theory states that an accounting method once chosen, should be applied to future accounting periods [1] to enable meaningful comparison of the financial performance of the business. [1] [Total: 9] Q3 (a) Debit $ Credit $ Equipment 900 [1] Trade payable Bernardo 900 [1] (b) Effect of error on Profit Overstated $ Understated $ No effect Error 2 60 [1] Error 3 ✓ [1] Error 4 75 [1] (c) The accounting entity theory states that the activities of a business are separate from the actions of the owner. [1] All transactions are recorded from th e point of view of the business. [1] [Total: 7]

Q4 (a) 30 Sep 2020 30 Sep 2021 Workings Average net TR