MI 2021 Prelim Paper 1 Answer Guide

This question paper consists of 9 printed pages and 1 blank page. [Turn over H2PAA 2021 Prelim Paper 1 Answer guide Qn 1 (a) Street Wear Pte Ltd Statement to correct the net loss for the year ended 31 July 2020 $ Unadjusted net loss for the year (32,000) (1) Impairment loss for specialised equipment (700-200)-(350>290) (150,000) (1m) (2) Impairment loss for inventory (3000-2300) (7,000) (1m) (3) Unpresented cheques & direct transfer NIL (4) Impairment loss for trade receivables (710000-10000-128000)x5%)+10000 (38,600) (2m) (5) Overstatement of repairs and maintenance (45000 – 2500 - (5/12 x 2100) 41,625 (2m) (6) Depreciation of plant and equipment (40400x0.25) (10,100) (1m) Adjusted net loss for the year (196,075) (b) Street Wear Pte Ltd Balance sheet as at 31 July 2020 $ $ $ Non-current assets Cost Accumulated Depreciation Net book Value (1m) Property and plant at cost (5000k+40.4k) 5,040,400 (1,710,100) 3,330,300 (1m) Specialised equipment at cost 700,000 (350,000) 350,000 3,680,300 Current assets Inventory (1,476,000-7000) 1,469,000 (1m) Trade receivables (710,000-10,000-128,000) 572,000 Less : Allowance for impairment of trade receivables (700kx5%) (28,600) 543,400 (1m) Prepaid insurance 1,225 (1m) Cash at bank (-88,000+128,000) 40,000 (1m) Total current assets 2,053,625 Total assets 5,733,925 (c) Based on the information presented, the specialised equipment are considered “impaired” because its net book value of $500, 000 ($700k - $200k) is greater its current recoverable amount. Recoverable amount is the higher of (fair value less cost to sell of $$350,000) and (value-in-use of $290,000). (1m) Impairment loss of $150,000 ($500k-$350k) is recognised in the income statement as an expense and a corresponding increase in the asset’s accumulated depreciation to lower its net book value in the Balance sheet. (2m) This is consistent with prudence / conservatism concept, which acknowledges all possible losses which should be recognised sooner rather than later, to ensure all ensure assets and income are not overstated and prevent understatement of liabilities and expenses. (1m)

2 (d) The company should not proceed with the proposal to change depreciation methods, because there are no strong reasons justifying a change of method. (1m) This would go against the accounting concept of consistency, which states that similar accounting procedures/methods should be used for items of similar nature from period to period, to facilitate meaningful comparison and informed decision-making. (1m) However, a change in accounting methods is acceptable if it results in a more relevant and faithful representation of an underlying economic phenomenon . Here, the doctrine of disclosure is needed to acknowledge such changes in the notes to the accounts to allow users to take it into consideration when making decisions. (1m)

3 Answers to Qn 2 (a) Strategic Marine Ltd Income statement as at 30 Apr 2020 $ $ Cash sales (76+84+78+38) 276,000 (1m) Credit sales [(276000 / 25) x 75] 828,000 Total Sales 1,104,000 Less : Cost of Sales Opening inventory (given) 45,000 Add : Purchases (350+210+85+130) 775,000 (1m) Less : Closing inventory (given) (90,000) 730,000 Gross Profit 374,000 Add : Other income Gain on disposal ($15000 - ($75k-$65k) 5,000 (1m) Less : Other Expenses General expenses (10+29+45+30) 114,000 (1m) Depreciation expenses 30,500 (1m) Interest expenses ($110,000 x 0.08 x 3/12) 2,200 (1m) Net Profit 232,300 (b) Strategic Marine Ltd Balance sheet as at 30 Apr 2020 (extract) Current assets Cash at bank (given) 320,000 (1m) Inventory (Given info # 7) 90,000 (1m) Trade receivables (38000/25) x75) or (66k+828k-780k) 114,000 (2m) Total current assets 524,000 Current liabilities Trade creditors (Given info # 2) 130,000 (1m) Interest payable ($110,000 x 0.08 x 3/12) 2,200 (1m) Total current liabilities 132,200 Working Capital 391,800 (c) Current ratio = 3.96 : 1 ($524,000 / $132,200) (1m) OF For every $1.00 of current liabilities, Strategic Marine Ltd has $3.96 of current assets to pay of its short term debts/obligations. (1m)

4 (d) Given that the current ratio of 3.96 : 1 is considerably higher than what is reflected in the industry standards of 2.80 : 1, it means that the company has $1.16 more of current assets to finance it short-term debts. (1m) Though a high current ratio may be an indicator of lowered risk, exces sive working capital may not be good as it reflects poor optimising of resources. The company should be making more effective use of its current assets. (1m) Excess working resources (eg cash at bank) could be diverted to more productive use or revenue generating activities. (1m) (Eg : Short term investments - fixed deposits or any other revenue generating activity that is acceptable).(1m) (e) Varying efficiencies of managing working capital : Companies with stringent/stricter collection policies will have lower levels of trade receivables and those with better negotiation skills are offered longer credit periods from credit suppliers. Companies will alter their credit policies to better match their working capital needs and no 2 companies will have similar working capital requirements. Varying company size could mean varying capital structures : Bigger firms with more resources, have access to larger short -term loans or bank overdraft facilitie s or have the ability to raise capital via sale of shares, thus have greater CA as compared to smaller firms, hence impacting their current ratios. (impact CA – cash & CL – Bank overdraft, interest payable) Different mode of business : Companies with varying modes of operations (Eg. Physical stores vs online or e -commerce platforms), could have varying amounts of inventory. Most online businesses have low levels of inventory or adopt Just -in-time inventory mgmt, given limited space. Physical stores which k eep inventories also incur additional costs owed. (Eg Storage, pallets etc) as compared to those with lower inventory levels. (impact CA - inventory) Different level of experience : Varying levels of experience in the market could result in some companies being offered lower prices for inventory, given established working relationships built. Smaller companies with lesser experience pay retail prices without discounts offered to thos e with a longer working relationship with vendors. (impact CA - inventory) (Accept any 2 x 1m)

5 Answers to Qn 3 (a) • Bonus issue of share is done to distribute excess reserves to shareholders but rights issue is done to raise funds. • Cash/ net assets increases with a rights issue but not bonus issue. • Share equity is increased with a rights issue but there is no change to equity in a bonus issue. • Any other points (Accept any 2 x 1m) (b) AB Limited - Statement of changes in equity for the year ended 31 March 2021 Pref Share Capital Ordinary Share Capital Retained earnings Asset Rev. Reserve Total $000 $000 $000 $000 $$000 Beginning balance 200 400 (165) 0 /Changes in equity for the year Revaluation of assets 900 (1m) Bonus issue of share capital ($400 x 2) 800 (800) (1m) Rights Issue of share capital [(800 + (800 x 2)) 3/2 x $0.40] 1 440 (1m) Net profit [318- (10%x600x9/12 +10%x200x3/12] 268 (1m) Preference dividends (8% x 200) (16) (1m) Ordinary Dividends [$0.02 x (orig 800 + bonus (800 x 2) + rights (800 + (800 x 2) 3/2 ] (120) (2m) Ending balance 200 2 640 (33) 100 2907 (1m) O/S No ‘000 $’000 Beginning 800 400 1 Sep: 2 for 1 BI 1600 800 2400 1200 1 Oct: 3 for 2 RI at $0.40 3600 1440 6000 2640 (c) Dividend per o