Deyi 4EXP Prelim Paper 1 2024 Answers

Deyi Secondary School Secondary 4E/5NA Prelim Paper 1 MARK SCHEME 1 Frosty Slushies has a financial year end on 31 March 2024. The following ledger account has been prepared. REQUIRED (a) Interpret each of the entries in the sale of equipment account. (i) Equipment On 31 March 2024, the original cost of the equipment sold is $20 000. [1]/ On 3 March 2024, the business sold an equipment that cost $20 000. [1]. (ii) Accumulated depreciation of equipment The equipment being sold on 1 January 2024, had a total depreciation of $3 800 to date. [1] (iii) Other receivables- Freezie The disposal proceeds of the equipment sold on credit to Freezie was $24 500. [1] OR The equipment sold to Freezie on credit was for $24 500. [1] (b) State the effect and amount of the sale of equipment on the following: (i) The net book value of the non-current assets will decrease by $16 200. [1] (ii) Profit will increase by $8 300. [1] (c) Define ‘depreciation’. Depreciation is the allocation of cost of a non-current asset over its estimated useful life. [1] Sale of equipment Date Particulars Debit $ Credit $ Balance $ 2024 Mar 31 Equipment 20 000 20 000 Dr Accumulated depreciation of equipment 3 800 16 200 Dr Other receivable-Freezie 24 500 8 300 Cr Income summary 8 300 -

2 (d) Name and explain an accounting theory why Frosty Slushies needs to provide for depreciation on its non-current assets. According to the matching theory [1], expenses incurred must be matched against the income earned in the same period to determine the profit for the period (Definition). As the non-current assets are being used to generate income, a portion of the cost of using the non- current asset (depreciation expense) should be matched to the income earned in the same financial period to determine the profit for the period(Link). [1] OR According to prudence theory [1], the business should not overstate the value of its assets and profits (Definition), hence the business should record the loss in value of the assets by providing for depreciation (Link). [1] (e) State two non-accounting information a business should consider when deciding to purchase a non-current asset. Purpose of non-current assets [1] Features of non-current assets [1] Customer reviews of the non-current assets [1] Warranty of non-current assets [1] Any 2 of the above. [Total : 10]

3 2 Evermore Gym took up a $150 000 loan from Infinity Bank at an interest rate of 2% per annum on 1 May 2022 and the amount was deposited in the business’ bank account. The loan is to be repaid equally over 5 years. The loan and interest expense are repayable every year on 30 April 2023.The financial year of Evermore Gym ends on 31 December. REQUIRED (a) Prepare the journal entry to record the borrowing on 1 May 2022.Narration is not required. Journal Date 2022 Particulars Debit $ Credit $ May 1 Cash at bank 150 000 [1] Long term borrowing/ Bank loan- Infinity Bank 150 000 [1] [2] (b) Calculate the interest expense and the interest expense payable for the two years ended 31 December 2022 and 2023. Show all the workings clearly. 31 December Interest expense Interest expense payable 2022 1 May 2022 to 31 Dec 2022: 2% X $150 000X 8/12=$2 000 [1] 1 May 2022 to 31 Dec 2022: $2 000 [1] 2023 1 Jan 2023 to 30 Apr 2023: 2% X $150 000X 4/12=$1 000 1 May 2023 to 31 Dec 2023: 2% X $(150 000- 30 000)X 8/12 =$1 600 $1 600 + $1 000= $2 600 [1] 1 May 2023 to 31 Dec 2023: 2% X $(150 000- 30 000)X 8/12 =$1 600 [1] [4] (c) State the effect on profit if interest expense was not adjusted on 31 December 2023. Interest expense will be understated by $1 600. Profit will be overstated by $1 600 [1]

4 (d) Name one stakeholder other than banks and lenders, who would be interested in the financial performance of the business. Give a reason for your answer. Stakeholder: Investors/Shareholders [1] Reason: They would want to know how well the business manages its borrowing practices as it will affect its returns (such as dividends). [1] Stakeholder: Suppliers [1] Reason: They need to assess the business’ ability to pay the goods purchased on credit and not to have defaults in payment. [1] Stakeholder: Employees [1] Reason: They need to know how well the business manages its borrowing practices as excessive borrowing could have an impact such as delayed salaries/ reduced employment benefits.[1] Stakeholder: Customers [1] Reason: They need to know how well the business manages its borrowing practices as excessive borrowing affect the quality/ delay of the goods/services from the business.[1] Any 1 of the above. [2] [Total: 9]

5 3 On 1 June 2023, Minion Private Limited provided the following information. The financial year for the business ends on every 31 May. $ Share capital,150 000 ordinary shares 300 000 Retained earnings 54 000 On 20 August 2023, the business issued 20 000 ordinary shares at $2 each. The business declared a dividend of $0.10 per share to be paid on 15 June 2024 and made a profit of $25 300 for the year ended 31 May 2024. REQUIRED (a) Define the following terms: (i) Share Capital Cash raised by issuing shares to shareholders. [1] (ii) Retained earnings It is the accumulation of profits and losses that have not been distributed to shareholders since the business started operation. [1] (b) Prepare the journal entry to record the transaction on 20 August 2023. A narration is not required. Journal Date 2023 Particulars Debit $ Credit $ Aug 20 Cash at bank 40 000 [1] Share Capital 40 000 [1] [2]

6 (c) Prepare the retained earnings account for the year ended 31 May 2024. Retained earnings account Date Particulars Dr ($) Cr ($) Bal ($) 2023 Jun 1 Balance b/d 54 000Cr [1] 2024 May 31 Income summary (Profit) 25 300 [1] 79 300Cr Dividends ($0.10 * 170 000) 17 000 [1] 62 300 Cr Jun 1 Balance b/d 62 300 Cr [3] (d) Complete the table by placing a tick (√) to show the effect on retained earnings for the following items. When there is no effect, tick (√) the “No effect” column. Increase $ Decrease $ No effect $ (i) Dividends √ [1] (ii) Issuance of additional shares √ [1] (iii) Profit for the year √ [1] [Total: 10]

7 4 Linda runs a business selling healthy smoothies. She has provided the following information at 31 December 2022 and 31 December 2023. 2022 2023 Non-current assets $ $ Equipment (net book value) 35 000 10 000 Current assets Inventory 12 500 9 200 Trade receivables 14 500 16 300 Cash at bank 5 000 - Prepaid salaries 3 200 2 100 Current liabilities Bank overdraft - 2 000 Current portion of long-term borrowing 1 000 Trade payable 11 800 12 200 Non-current liabilities Long-term borrowing 5 000 4 000 Current ratio 2.98 ? Quick ratio 1.65 ? REQUIRED (a) Define ‘liquidity’. Liquidity is the ability of the business to repay its current liabilities when they fall due. [1] OR Liquidity measures how able the business is to convert current assets into cash to pay for current liabilities. [1] Any 1 of the above. (b) Calculate the current ratio as at 31 December 2023. Show y