MI 2022 MYE Paper 1 Answer Guide

2022 PU3 Mid-year Examination Paper 1 Mark scheme Question 1 (a) Computation of credit sales Ending balance of Trade receivables = Beginning balance + Credit sales – Receipts from credit customers 154 000 = 162 000 + Credit sales – 420 000 Credit sales = 420 000 + 154 000 – 162 000 = $412 000 Cost of sales = $(70 000 + 412 000) X 80% = $385 600 Computation of purchases Ending balance of trade payables = Beginning balance + Credit purchases – Payments to credit suppliers 130 000 = 124 000 + Credit purchases – 288000 Credit purchases = 130 000 – 124 000 + 288 000 = $294 000 Computation of ending inventory Ending balance of inventory = Beginning balance + Purchases – Cost of sales = 153 000 + 294 000(2m) – 385 600 (4m) = $61 400 9(1m) Cost of inventory destroyed = $(61 400 – 14 000) = $47 400. (1m) (b) Computation of units of closing inventory = (1 + 2 +3 +2) – 5 = 3 (i) Computation of value of inventory under FIFO = (2 units X $24000) + (1 unit X $23 000) = $(48 000 + 23 000) = $71 000 (2m)

(ii) Computation of value of inventory under WAC IN OUT BAL 2021 Units Unit cost($) $ Units Unit cost($) $ Units Unit cost ($) $ May 1 14 000 14 000 2 20 000 40 000 3 18 000 54 000 (1m) June 1 18 000 18 000 2 18 000 36 000 Sept 3 23 000 69 000 5 21 000 105 000 (1m) Oct 3 21 000 63 000 2 21 000 42 000 Nov 2 24 000 48 000 4 22 500 90 000 (1m) Dec 1 22 500 3 22 500 67 500 (1m) Value of inventory under WAC = $67 500. (c) Impact on ending inventory: Higher than under WAC (1m) as the cheaper units bought earlier is assumed to be sold, leaving behind the higher priced units unlike WAC where the prices are averaged. (1m) Impact on gross profit: Higher than under WAC (1m) as the cheaper units are assumed to be cost resulting in a lower cost of sales (1m) and hence a higher gross profit. (d) Advantage of WAC  Averaging of cost smoothens out the monthly ending inventory and profits.  Results in a cost of sales which approximates the current cost of inventory which is a more prudent indicator of future profits in times of rising prices.  More difficult to manipulate profits using WAC. [Any 1 X 2m] Question 2 (a) Wanderlust Pte Limited Income Statement for the year ended 30 June 2022 $ $ Sales of holiday packages (1 269 300 – 31 000) 1 238 300 1m Less: Expenses Payments to travel companies (650 000 – 12000) 638 000 1m Rental of shop premises 220 600 Staff salaries 90 500 Operating costs (192 700 – 8000) 184 700 1m Depreciation [ 20% X (260 000 + 8000)] 53 600 1m Impairment loss on trade receivables 4 200 1m 1 191 600 Net profit 46 700

(b) Balance sheet as at 30 June 2022 $ $ $ $ Non-current Assets Cost Acc Depn Net book value Computer & office equipment 268 000 107 600 160 400 2m Total non current assets 160 400 Current Assets Trade receivables (35 100 +1000) 36 100 1m Less: Allowance for impairment loss (4 200) 1m Net trade receivables 31 900 Prepayments 12 000 1m Other receivables- insurance claim 23 000 1m 66 900 227 300 Equity Share capital and reserves Ordinary share capital (80 300 + 10 000) 90 300 1m Retained earnings (-10 000 + 46 700 – 8 100) 28 600 1m 118 900 Current Liabilities Trade payables (17 900 – 10 000) 7 900 1m Deposits from customers 31 000 1m Provision for fire damage 23 000 1m Bank overdraft 46 500 108 400 227 300 (c) Accrual concept: Income to be recognised only when earned regardless of receipt. The income for the tour packages has not been earned as service will be provided after year end and should be excluded from current year’s income. To be shown as a current liability ( deposits ) as at accounting year end. (2m) Matching principle: To determine profit, expenses must be matched against income that it helped earn. As the income from the promotion packages will only be recognised in the next accounting period, the related cost should also be recognised only in the next accounting period. The payment made to travel companies should shown as a current asset, prepayment in current period. (2m)

Question 3 (a) Present ($) Option 1($) Option 2 ($) Option 3($) Ordinary shares of $0.25 each 2 600 000 2 600 000 2 600 000 2 600 000 Issue of ordinary shares - 5 000 000 5 000 000 - 8% preference shares of $1.00 each 1 600 000 1 600 000 1 600 000 1 600 000 Revaluation reserve 4 000 000 4 000 000 - 4 000 000 Retained earnings 1 300 000 1 300 000 300 000 1 300 000 Net asset value 9 500 000 14 500 000 9 500 000 9 500 000 No of shares 10 400 000 20 400 000 30 400 000 10 400 000 (i)Net asset value = Net asset value / No. of ordinary shares $0.91 (9500000/10400000) $0.71 (2m) (14500 000/20400000) $0.31(2m) (9500 000/30400000) $0.91(2m) (9500 000/ 10400000) (ii)Debt-equity ratio = Total liabilities/ Equity 10.52% (1 000 000/ 9 500 000) 6.89% (1m) (1000000/9500000) 10.52% (1m) 63.16%(1m) (b) Advantage Disadvantage Rights Issue of shares  Encourages existing shareholders to invest by allowing them to invest at $0.10 below market price.  No dilution of control as shares are issued in proportion of existing shareholdings.  Dividends are not mandatory. It is declared only if the company makes profits. Ordinary share dividends are also not fixed.  Share capital need not be returned to shareholders until dissolution of the company.  Lower gearing decreases the risk of a business not being able to repay its interest and debt. (6.89%)  Ordinary shares have voting rights which allows the shareholders to interfere with mgt decisions.  Fall in Net asset value per ordinary from $0.91 to $0.71 may not gain the support of existing shareholders. Bonus issue  No outflow of cash. Conserves the cash which may otherwise be used for dividend distribution.  Maximises the use of revaluation reserves to reward shareholders.  No inflow of cash. Hence, does not bring the funds needed for expansion.  Fall in net asset value per share from $0.91 to $0.31 may not gain shareholder support. Issuing bonds  Bond holders have no voting rights and have no direct control over the management of a business.  If interest rates are lower than the returns on capital employed of a company, it stands to earn a higher return for its shareholders.  Interest expense is mandatory and must be paid regardless of whether the company makes a profit or not.  Bonds must be repaid sometime in the future. Business must set aside resources or seek new funding to meet such payments.  Increased level of gearing will increase risk of business not being able to settle its interest and borrowings, leading to insolvency.(63.16%) [1m adv + 1m disadv] X 3 = 6

(c) A long term loan of $5 000 000 will increase its debt -equity ratio from 10.92% to 63.16% .This increases its fixed cost of capital in the form of interest. It runs the risk of not being able to generate enough profits to cover its interest, resulting in a loss especially as trading conditions are expected to deteriorate.(1m) Increasing long tern borrowing in adverse economic conditions could results in a disproportionate fall in Earnings Per Share as much of its lower operating profit will be used to service or pay interest on its fixed cost loans.(1m) The company should consider Option 1(1m) raisi ng funds through the rights issue of shares as dividends are not mandatory and can be avoided when there are losses or when profits are low. (1m) This allows it to reinvest its profits as well as conserve cash to tide over difficult trading conditions. A rights issue is likely to be more successful in difficult times as existing shareholders are likely to be more supportive of the business.(1m).

Question 4 (a) Retained