2022 QTSS 4E5NA Prelims P1 ANS

[Turn over Marking Scheme 2022 Prelims P1 Sec 5NA 1 Wanda runs Scarlet Witch Bakery. She rents a shop to expand her business. Her business has a financial year end of 31 March. The following information has been provided. Rent expense account Date Particulars Debit $ Credit $ Balance $ 2021 Apr 1 Rent expense payable 600 600 Cr 2022 Jan 31 Cash at bank 30 500 29 900 Dr Mar 31 Prepaid rent expense 5 900 24 000 Dr 31 Income summary 24 000 REQUIRED (a) Interpret the entries on the following dates. (i) 1 April 2021 Rent expense payable of $600, incurred for the year ended 31 March 2021/ previous financial year, was reversed and deducted from rent expense in the current year. [1] (ii) 31 March 2022 $5900 of rent expense which was paid in advance but not yet incurred was deducted from the rent expense account in the current year. [1] Scarlet Witch Bakery/ The business incurred rent expense of $24000 and the amount is closed/transferred to income summary account. [1]

2 On 1 April 2021, Scarlet Witch Bakery has $800 of commission received in advance. During the year ended 31 March 2022, the business received cheques amounting to $4 200 for commission income. On 31 March 2022, the business still has not received $1 200 of commission income earned. REQUIRED (b) Calculate the amount of commission income earned for the year ended 31 March 2022. Show your workings clearly. Commission income earned = -800 (commission received in advance) [1] + 4200 (commission received) [1] + 1200 (commission receivables) [1] = 6200 (c) Prepare journal entries to adjust the commission income for the year ended 31 March 2022. A narration is not required. Journal Debit $ Credit $ 2022 Mar 31 Commission receivables 1200 [1] Commission income 1200 [1] (d) State and explain the accounting theory that is applied when adjusting the commission income for the year ended 31 March 2022. Name: Accrual basis of accounting theory [1] Explanation: Income is recorded when it is earned regardless of whether cash has been collected or not. Since commission income is earned although cash has not yet received, it has to be recorded. [1] OR Name : Matching theory [1] Explanation: Income earned is matched against the expense incurred so that profit can be calculated. Since commission income is earned, it has to be recorded. [1] [Total:10]

3 [Turn over 2 The following trial balance was extracted from the books of Dr Strange Ltd on 31 July 2022. $ Sales revenue (I) 51 500 Cost of sales (Ex) 25 600 Motor vehicles (A) 29 700 Bank overdraft (L) 2 900 Share capital (Eq) 10 000 Trade receivables (A) 8 100 Trade payables (L) 2 400 Commission income (I) 300 Motor vehicle expenses (Ex) 5 700 Retained earnings (Eq) 2 000 The following errors were discovered after the trial balance was prepared. 1 Payment of $150 for motor vehicle expenses was charged to motor vehicles. Dr (+) Motor vehicles expenses 150 Cr (-) Motor vehicles 150 2 Debit note of $500 issued to a credit customer has not been recorded. (undercharge – have to top up) Dr (+) Trade receivables 500 Cr (+) Sales revenue 500 3 Commission received of $540 had been debited to the commission income account and credited to the cash at bank account. Dr (+) Cash at bank 540X2 Cr (+) Commission income 1080 REQUIRED (a) Explain the limitation of a trial balance. A balanced trial balance is not an absolute proof of accuracy. There may be errors not revealed by trial balance. [1] (b) Complete the table to show the effect of the errors 1-3 on the profit for the year. Where there is no effect, tick (√) the ‘no effect’ column. The first one has been completed as an example. Profit is overstated $ Profit is understated $ No effect $ Error 1 150 Error 2 500 [1] Error 3 1080 [1] [2]

4 (c) Prepare the adjusted trial balance as at 31 July 2022, after correction of errors. Trial Balance as at 31 July 2022 Debit $ Credit $ Sales revenue (I) (51500+500[1]) 52000 Cost of sales (Ex) 25600 Motor vehicles (A) (29700-150[1]) 29550 Bank overdraft (L) (-2900+1080[1]) 1820 Share capital (Eq) 10000 Trade receivables (A) (8100+500[1]) 8600 Trade payables (L) 2400 Commission income (I) (300+1080[1]) 1380 Motor vehicle expenses (Ex) (5700+150[1]) 5850 Retained earnings (Eq) 2000 # 69600 69600 # 1 mark awarded for correct total, format and all accounts are recorded in the correct column [7] [Total:10]

5 [Turn over 3 Wong started his retail business , Sorcerer Supreme Gifts. On 1 July 2021, the business bought toys from an overseas supplier on credit. The following costs were incurred on the purchase of his first batch of books: $ Cost of 30 toys 5 000 Import duties on toys 450 Salaries paid to workers hired to repack the toys 1 500 Expenses paid for marketing the toys 500 REQUIRED (a) Calculate the cost of purchases on 1 July 2021. Show all workings clearly. Cost of purchases = 5000+450+1500 = 6950 [1] In the month of July 2021 , the business also carried out the following cash transactions. The business records inventory movement using the First -In-First- Out (FIFO) method. Purchases Sales 6 July 30 toys at $5 500 14 July 30 books for $8 500 13 July 40 toys at $6 800 20 July 30 books for $8 000 REQUIRED (b) Prepare the inventory account for the month ended 31 July 2021 and bring down the balance to the next month. Inventory account Date Debit $ Credit $ Balance $ 2021 July 1 Trade payables 6950 OF [1] 6950Dr July 6 Cash at bank 5500 [1] 12450Dr July 13 Cash at bank 6800 19250Dr July 14 Cost of sales 6950[1] 12300Dr July 20 Cost of sales 5500 [1] 6800Dr Aug 1 Balance b/d 6800Dr [4]

7 [Turn over On 30 June 2022, the business discovered that some of the toys were damaged due to humidity. These toys now had a net realisable value of $ 5 450. The cost of these toys was $7 500. Wong decides to report the inventory value as $7 500 in the statement of financial position as at 30 June 2022. REQUIRED (c) Evaluate if Wong is making the correct decision. Justify your answer with an accounting theory. Wong is not making the correct decision . [1] (No mark is awarded if not supported by an explanation) According to prudence theory, inventory is at cost and net realisable value, whichever is lower so that assets and profit will not be overstated. [1] In this case, Wong should value the inventory at the net realisable value of $5450. [1] Karl, Wong’s accountant, is afraid that he will be terminated if he does not agree with his employer’s decision. REQUIRED (d) Advise Karl on the correct course of action. Support your answer with a professional ethic of accounting. Karl should not agree with his employer. [1] (No mark is awarded if not supported by an explanation) An accountant should be objective, which mean he should not to let bias, conflict of interest or the undue influence of others to override professional judgement. [1] [Total:10]

8 4 America Chavez is setting up a business selling designers’ bags from Europe. She understands that there are three forms of business ownership. They are sole proprietorship, limited liability partnership and private limited company. REQUIRED (a) Explain one difference between limited liability partnership and private limited company. Category Limited liability partnerships Private limited company. Ownership Owned by two or more partners Owned by 50 or less shareholders Level of control Control of running the business is shared among partners Shareholders have no control over