2022 O Level 7087 Answer

Suggested Solution O-Level 2022 Principles of Accounts Paper 1 Q1 (a) 4 stages of accounting cycle: 1) Stage 1: Identify and record Source documents are used to record transactions in the journal daily. Journal entries are posted to the ledger. 2) Stage 2: Adjust The ending balances of ledger accounts are listed in a trial balance. Any adjusting entries are recorded in the journal and posted to the ledger. Accounts are adjusted at least once in a financial year. 3) Stage 3: Report Based on adjusted trial balance, financial statements are prepared at least once in a financial year. 4) Stage 4: Closing After the financial statements are finalised, income, expenses, income summary, drawings and dividends accounts are closed. Accounts are closed once at end of financial year. [4] (b) Transaction Source document Purchase motor vehicle on credit Invoice Paying credit supplier by cheque Payment voucher Notifying credit customer of overcharge Credit note [3] (c) Transaction Account to be debited Account to be credited 1 Office equipment Capital 2 Trade payable Aisha Inventory [4] [Total: 11] Q2 (a) Revenue Recognition Theory [1] Revenue is earned when goods have been delivered or services have been provided. [1] (b) (i) 31 Dec 2021 – the business provided service to a customer on credit for $34,900. [1] (ii) 30 Sep 2022 – Service fee revenue of $3,600 was received in advance as service has not been provided. [1] (c) (i) Service fee revenue received in advance is not earned during the year, hence should be deducted from the statement of financial performance. Not adjusting it would cause profit for the year to be overstated by $3,600. [1] (ii) Service fee revenue received in advance is a current liability. Not adjusting for it will cause the current liabilities to be understated by $3,600 [1]. Profit for the year overstated by $3,600 would cause equity to be overstated by $3,600. [1]

(d) Advertising expense to be transferred to income summary = 7500 + 780 + 50 = $8,330 [2] (e) Extract of Statement of Financial Performance for the year ended 30 September 2022 $ Service fee revenue 82 600 [1] Other Income Rental income (9000+500) 9 500 [1] Less: Other Expenses Advertising expense 8 330 [1] [3] [Total: 12] Q3 (a) Working capital is current assets less current liabilities. [1] (b) The current ratio considers the total current assets of the business but the quick ratio considers only the quick assets, which does not include inventory and prepayments. [2] (c) • The current ratio improved from 1.95 in 2021 to 2.64 in 2022. [1] • This was due to the $45 000 increase in total current assets and the slight $3 400 decrease in total current liabilities. [1] • However, the quick ratio worsened slightly from 1.58 in 2021 to 1.54 in 2022, but it is still above the general benchmark of 1. [1] • The improvement of current ratio and worsening of quick ratio indicates that the increase in total current assets could be mostly due to an increase in inventory and prepayment. [1] • In conclusion, Benedict’s business is still able to repay its short term debts on time but its liquidity position has worsened slightly. [1] [Total: 8] Q4 (a) Depreciation is the allocation of the cost of a non -current asset over its estimated useful life. [1] (b) Prudence theory; Matching theory [2] (c) Depreciation expense 2021 = (250 000 – 0) x 20% = $50 000 [1] Depreciation expense 2022 = (250 000 – 50 000) x 20% = $40 000 [1] (d) (i) Depreciation expense will be overstated by $10 000, causing profit for the year to be understated by $10 000. [2] (ii) Accumulated depreciation will be overstated by $10 000, causing the net book value of the gym equipment to be understated by $10 000. [2] [Total: 9]

Suggested Solution O-Level 2022 Principles of Accounts Paper 2 1(a) LMN Pte Limited Statement of Financial Performance for the year ended 31 August 2022 $ $ Sales revenue [1] 438 820 Less: Sales returns [1] 21 300 Net sales revenue 417 520 Less: Cost of sales [1] 265 900 Gross profit 151 620 Other income Commission income (28 200 – 1 200) [1] 27 000 Less: Other Expenses Wages and salaries (63 000 + 870) [1] 63 870 Utilities expenses 7 800 Rent and rates (10 750 – 500) [1] 10 250 Depreciation on fixtures and fittings [10% x (270 000 – 30 000)] [1] 24 000 Depreciation on motor vehicles [30% x (125 000 – 63 750)] [1] 18 375 Impairment loss on trade receivables [(5% x 28 480) – 1 050 ] [1] 374 124 669 Profit for the year [1OF] 53 951 [10] 1(b) LMN Pte Limited Statement of Financial Position as at 31 August 2022 Assets $ $ $ Non-current assets Cost Accumulated Depreciation Net book value Fixtures and fittings (48 000 + 24 000) 270 000 72 000 [1] 198 000 Motor vehicles (63 750 + 18 375) 125 000 82 125 [1] 42 875 240 875 Current assets Trade receivables 28 480 Less: Allowance for impairment of trade receivables (5% x 28 480) 1 424 [1] 27 056 Inventory 42 500 Cash at bank [1] 11 900 Prepaid rent and rates [1] 500 39 456 Total assets 322 831 Equity and Liabilities Shareholders’ Equity Issued share capital, 75 000 ordinary shares [1] 150 000 Retained earnings (99 510 + 53 951 – 7 500) [1] 145 961 295 961 Current liabilities Trade payables 17 300 Commission income received in advance [1] 1 200 Wages and salaries payable [1] 870 Dividends payable (0.10 x 75 000) [1] 7 500 26 870 Total equity and liabilities 322 831 [10]

Q2 (a) (i) Amount owed by Zheng = 5 000 x 95% = $4 750 [1] (ii) Cash discount received by Zheng = 4 750 x 2% = $95 [1] (b) Double entry: Debit Trade payable KQ Computers $4 750 [1] Credit Discount received $95 [1] Credit Cash at bank $4 655 [1] (c) Any 2 Type of stakeholder The use of accounting information 1 Owners / Shareholders 1) To eva luate w hether to continue investing in business, depending on the risks and returns 2 Managers 1) To evaluate how the business is doing 2) To consider ways to improve the performance of the business 3 Employees 1) To decide whether to continue working for the business 4 Lenders 1) To decide whether to grant loans to the business 2) Evaluate whether the business is able to repay its debts 5 Suppliers 1) To decide whether to sell to the business on credit 2) Evaluate whether the business is able to repay its debts 6 Customers 1) Consider whether to buy from the business, depending on its ability to provide goods and/or services that they need and good after-sales service 7 Government 1) To decide the amount of tax to collect 2) Evaluate w hether the business compli es with the tax regulations 8 Competitors 1) To compare their performance against the business 2) To consider how to improve their own performance [4] (d) Non-accounting information: (Any two) 1) Local or overseas seller 2) After-sales service 3) Return policy 4) Online or brick-and-mortar supplier 5) Reputation of supplier 6) Warranty [2] [Total: 11]

Q3 (a) Double entry: Debit Impairment loss on inventory $2250 [1] Credit Inventory $2250 [1] (b) Double entry: Debit Insurance claim receivable $2250 [1] Credit Impairment loss on inventory $2250 [1] (c) Prudence theory states that business should not overstate its assets and profits by recognising the inventory value at the lower of cost and net realisable value [1] (d) Days sales in inventory 2022 = Average inventory / Cost of sales x 365 = [(50 000 + 59 000) / 2] / 326 000 x 365 = 54 500 / 326 000 x 365 = 61.02 days [2] (e) ▪ Luna’s days sales in inventory has wor