MI 2022 MYE Paper 1 QP

Section A Answer all questions in this section 1 Wheels & Deals Private Limited trades in premium motorcycles. On 30 April 2021, there was a fire in its warehouse and only one unit of motorcycle costing of $14 000 located in its showroom was salvaged. I ts accounting records for inventory which were kept in the warehouse were also destroyed. The following information has been pieced together: Balance sheet extracts at 31 December 2020: $ Inventory 153 000 Trade receivables 162 000 Trade payables 124 000 Other information for the accounting period 1 January 2021 to 30 April 2021: $ Cash sales 70 000 Receipts from credit customers 420 000 Payments to credit suppliers 288 000 The following balances at 30 April 2021 are available: $ Trade receivables 154 000 Trade payables 130 000 The firm sells its goods at a margin of 20% on sales. REQUIRED a A calculation of the cost of the inventory destroyed. [8] Additional Information The company uses the first – in first - out method of valuing its inventory. The cost price of its inventory, motorcycles, has been steadily increasing in the recent months. The director proposes that the company should change to the weighted average cost method instead. Below are its transactions for May to December 2021. 2021 Purchases Sales May 2 at $20 000 each June 1 at $30 000 September 3 at $23 000 each October 3 at $36 000 each November 2 at $24 000 December 1 at $37 000

2 REQUIRED b Compute the value of its inventory as at 31 December 2021 using: (i) First-in first out (ii) Weighted average cost [6] c Explain the impact of rising prices on cost of inventory and gross profit when using the first – in first – out method of valuing inventory [4] d Explain an advantage of using the weighted average cost method of valuing inventory in times of rising prices. [2] [Total: 20] [Turn over

3 2 Wanderlust Pte Limited provides travel services in the form of tour packages to Asia. The trainee accountant has extracted the following balances for the year ended 30 June 2022. $ Computer and office equipment: Cost 260 000 Accumulated depreciation at 1 July 2021 54 000 Sales of holiday packages 1 269 300 Payments to travel companies 650 000 Rental of shop premises 220 600 Staff salaries 90 500 Share capital 80 300 Retained losses at 1 July 2021 10 000 Dividends 18 100 Operating costs 192 700 Trade receivables 35 100 Trade payables 17 900 Bank overdraft 46 500 The following additional information is to be taken into account before preparing the final accounts for the year. 1 New office equipment cost ing $8 000 was purchased just before the year end. This had been debited in error to the operating costs account. Wanderlust’s policy is to charge depreciation at the rate of 20% per annum on cost at the end of the year. 2 A customer owing $1 000 had been included in the accounts payable balances as $10 000. 3 Additional share capital of $10 000 issued during the year h ad been debited to the dividend account. 4 Wanderlust made a sales promotion during June 2022. Customers taking advantage of this had paid deposits of $31 000 for holiday packages to be taken in 2023. This had been included in the sale of holiday packages figure. The cost of the promotion packages amounted to $12 000 had been paid to travel companies. 5 A fire occurred in one of the shops on 15 June 2022. This had caused damage estimated at $23 000. The directors expected this to be covered by its insurance claim.

4 6 A customer who owed $4 200 at 30 June 2022 was uncontactable. Investigations revealed that the customer had emigrated to another country. REQUIRED a Prepare an income statement for the year ended 30 June 2022, taking additional information 1 to 6 into account. [5] b Prepare Wanderlust’s balance sheet as at 30 June 2022. [11] c Explain your treatment of additional information 4. Justify your answer by making reference to any accounting conventions. [4] [Total: 20] [Turn over

5 3 The directors of Capers Pte Limited are considering an expansion of the company’s operations which is estimated to require a further $5 000 000 to be invested in the company. The following information has been extracted from the latest published balance sheet of the company: $ Ordinary shares of $0.25 each 2 600 000 8% preference shares of $1.00 each 1 600 000 Revaluation reserve 4 000 000 Retained earnings 1 300 000 6% bonds (2025) 1 000 000 The current price of the company’s ordinary shares is $0.60 whilst that of the preference share is $1.00. The directors are now considering how to raise the additional capital and have the company’s financial adviser to report on the advantages and disadvantages of the following in meeting the company’s projected capital needs: Option 1: A rights issue of ordinary shares at $0.50 each. Option 2: A bonus issue of ordinary shares at $0.25 each. Option 3: An issue of 6% bonds. REQUIRED a For each of the above options, compute the following: (i) Net asset value of each ordinary share (ii) Debt-equity ratio [9] b As the financial adviser, comment on each of the options proposed by the directors. You may use your computation in (a) above to support your answer. [6] c It is expected that next year’s trading conditions will be more difficult than this year due to an economic slowdown. Which of the three options would you recommend the directors to take? Give reasons for your recommendation. [5] [Total:20]

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7 Section B Answer all questions 4 Allswell Pte Limited which buys and sells home exercise equipment was started by two fitness enthusiasts on 1 January 2020. B usiness was good and it made profits in its first two years of operations. The directors were, however, a little puzzled by the decline in its cash and bank balances. Below are the balance sheets of Allswell Pte Limited as at 31 December: 2020 2021 $’000 $’000 Non current assets (NBV) 500 800 Current Assets Inventory 90 95 Trade receivables 60 50 Bank 35 - 685 945 Current Liabilities Trade payables 45 20 Bank overdraft - 20 Dividend payable 20 45 Share capital & reserves $1 Ordinary share capital 350 450 Revaluation reserve 100 - Retained earnings 70 210 Long Term Liabilities 10% Bonds 100 200 685 945 Additional Information 1 During the year ended 31 Dec ember 2021, non-current assets costing $400 000 were purchased and non-currents assets with a net book value of $50,000 were sold for $40 000. 2 All financing transactions took place on 1 January 2021. 3 Interim dividends amounting to $45 000 were paid in 2021. REQUIRED a Compute the net profit for the year ended 31 December 2021. [ 3 ] b Prepare a statement of cash flows for the year ended 31 December 2021. [12] c With reference to the statement of cash flows prepared in (b) above, explain to the directors why a net profit does not necessarily give rise to an overall inflow of cash for the business. [6]

8 The budding entrepreneurs were eager to improve their management of the business and wanted to know if they were trading efficiently. They provided the following information for the year ended 31 December 2021. $ Sales 820 000 Cost of sales 615