MI 2022 PU3 Prelimininary Examination 1 QP

2022 Preliminary Examination Pre-university 3 PRINCIPLES OF ACCOUNTING 9593/01 Paper 1 15 September 2022 3 hours READ THESE INSTRUCTIONS FIRST An answer booklet will be provided with this question paper. You should follow the instructions on the front cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation booklet. Section A Answer all questions. Section B Answer all questions. Start each answer on a new page. You may use a calculator. All calculations must be shown adjacent to the answer. The number of marks is given in brackets [ ] at the end of each question or part question. ___________________________________________________________________________ This document consists of 9 printed pages and 1 blank page [Turn over

2 Section A Answer all questions in this section 1 Gotham Supplies Limited deals in parts used for maintenance of motor vehicles. The business has the year-end date of 30 June 2022. At the end of June 2022, their accountant had calculated a net profit for the year of $60 884. No adjustments had been made for the following transactions. i. Closing inventory was valued at a cost of $12 760. On inspection, it had a net realisable value of $9 420. ii. Inventory costing $4 000 had been sent out on a sale or return basis to Joko Pte Limited, had been included in cost of sales. The accountant had also recorded it as a credit sale at a gross margin of 20%. iii. The business paid $480 to settle a bill of $500 from Black & Yellow, its supplier. iv. The business issued 100 000 ordinary shares of $0.50 each. REQUIRED a Copy the following table into your answer booklet and analyse transactions (i) to (iv) to show the effect upon the appropriate categories. Categories Transaction Total assets Profit Working capital Equity Increase Decrease Increase Decrease Increase Decrease Increase Decrease $ $ $ $ $ $ $ $ (i) (ii) (iii) (iv) [8] Gotham obtained the following information on two other business in the same industry with the same long-term finance: Gotham Hot Wheels Gears N Such $ $ $ 6% Bonds 400 000 300 000 - 8% Preference shares 400 000 300 000 400 000 $1 ordinary shares 200 000 400 000 600 000 Net profit before calculation of interest is $100 000 in each case.

3 REQUIRED b Assume that all of Gotham’s profits are to be distributed, how much ordinary dividend is payable by Gotham altogether? [2] c Which of the three companies is most highly geared? Support your answer with computation of relevant ratios. [2] d Explain the risks associated with high gearing. [4] e In years of high profits, is it better to be an ordinary shareholder or bond holder? Why? [2] f Apart from shareholders and investors, suggest two other stakeholders who may be interested in a company’s financial information. [2] [Total:20] [Turn over

4 2 Swee Silk Limited is a small private family company operating in a textile industry. A summary of the accounts for the years ended 31 March 2021 and 2022 is given below: 2021 2022 $’000 $’000 $’000 $’000 Non-current Assets Freehold property (Note 1) 60 650 Factory plant and machinery (Note 2) 85 280 Less: Accumulated depreciation 65 35 20 245 80 895 Current Assets Inventory 90 260 Deposit on new factory (Note 1) - 30 Trade receivables 85 195 Bank - 90 175 575 Total Assets 255 1 470 Equity Shareholders’ Equity Ordinary shares of $1 each 60 130 Revaluation reserves - 590 Retained earnings 55 175 115 895 Non Current Liabilities Loans (Note 3) 30 360 Current Liabilities Trade payables 36 115 Dividend payable 20 100 Bank overdraft 54 - 110 215 Total Equity and Liabilities 255 1 470 Income statement for the year ended 31 March 2022 $’000 $’000 Turnover 1 200 Less: Cost of sales (including depreciation) 700 Gross profit 500 Less: Expenses Administration expenses 80 Distribution expenses 120 Interest paid 60 260 Net profit 240

5 Additional information Note 1 During the year, freehold property which had cost $60 000 in 1990 was revalued at its current market value of $650 000. A deposit of $30 000 has been placed on a new factory which when completed will cost a total of $300 000. Note 2 During the year, all the old factory plant and machinery was sold for $15 000 and replaced by new high technology machinery costing $280 000. Annual depreciation is provided on plant and machinery on the last day of the financial year at 12.5%. Note 3 At 31 March 2021, outstanding loans totaled $30 000 and were repayable in equal instalments over the following three years. During the year, an additional loan of $400 000 was raised. This loan is to be repaid in quarterly instalments over the next five years. Note 4 Total dividends of $120 000 were declared in the year ended 30 March 2022. REQUIRED a A statement of cash flows for the year ended 31 March 2022. [10] b Comment on the company’s cash position and its significant cash flows in and out of the business for the year ended 31 March 2022. [8] c From your analysis in (b) above and other available information , indicate two financial problems the company may be facing. [2] [Total: 20] [Turn over

6 3 Johnny Limited is a furniture retailer operating in Singapore. On 30 June 2021, it had 3 400 000 ordinary shares in issue and a total of $5 000 000 in shareholders’ equity. It did not have any loan at that date. To expand the business overseas, the company undertook the following on 1 July 2021 1. Took a 10-year, $1 000 000 loan at 5% per annum. 2. Issued 2 000 000 in ordinary shares at $1 each to existing shareholders through a rights issue. For the year ended 30 June 2022, the company made an operating profit of $320 000. It paid an interim dividend of $60 000 and declared a final dividend of $120 000 out of the year’s profit. At 30 June 2022, the market price of one ordinary share of Johnny Limited was $2. REQUIRED a Calculate the total shareholders’ equity at 30 June 2022 [4] b Calculate the return on equity for the year ended 30 June 2022 [2] c Other than increasing its profits, suggest one other way in which the company could improve its return on equity in future. [2] Additional Information Kenny, an investor is thinking of buying shares in Johnny Limited or Lilly Limited, a company in the same industry as Johnny Limited. The following information relates to Lilly Limited: Earnings per share $0.10 Dividend yield 3% Price earnings ratio 50 times REQUIRED d Calculate the same three ratios above for Johnny Limited for the year ended 30 June 2022. [6] e Advise Kenny which company he should invest in. [6] [Total: 20]

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8 Section B Answer all questions 4 Marie Antoinette is a