MI 2021 Prelim Paper 1

Candidate Name: Class:_____________ This question paper consists of 9 printed pages and 1 blank page. [Turn over 2021 Preliminary Examination Pre-university 3 PRINCIPLES OF ACCOUNTING 9593/1 15 September 2021 3 hours Additional Materials: Answer Booklet 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 to a new question on a new page All calculations must be shown adjacent to the answer The number of marks is given in brackets [ ] at the end question or part question.

2 SECTION A Answer all questions in this section. 1. The accountant of Street Wear Pte Ltd, a local company selling fashion apparel, has produced the following set of balances, after preparing the income statement for year ended 31 July 2020. $000 Net Loss for the year 32 Retained earnings at 31 July 2019 680 Property and plant at cost 5 000 Accumulated depreciation for property and plant 1 700 Specialised equipment at cost 700 Accumulated depreciation for specialised equipment 200 Inventory 1 476 Trade receivables 710 Trade payables 2 600 Bank overdraft 88 Ordinary share capital at $1.00 each 2 000 Asset revaluation reserve 650 The directors met to finalise the accounts and agreed to make the following adjustments. 1. Upon consulting an appraisal company, it was determined that the specialised equipment had an estimated fair value of $350 000 and value-in-use of $290 000. 2. Included at cost in inventory are two batches of old clothing items. Their net realisable values are given below. Item Cost $ Net Realisable Value $ 1 30 000 23 000 2 40 500 50 000 3. A review of the bank statement for the month of July revealed $20 000 of cheques which were unpresented by suppliers and several cheques from major credit customers which were directly credited amounting to $128 000. 4. A major credit customer who owed $10 000 has gone bankrupt. Allowance for impairment of trade receivables is estimated to be 5% of trade receivables at year end. 5. An invoice dated 1 March 2020 for $45 000 for a newly built extension for the plant had been posted to repairs and maintenance account. This amount included repair costs of $2 500 and insurance of $2 100 for the 12 months to 28 February 2021. 6. The company depreciates property and plant at 25% on net book value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal. REQUIRED (a) Prepare a statement to show the corrected net profit or loss for the year ended 31 July 2020. [7] (b) Prepare an extract of the balance sheet as at 31 July 2020, showing only assets of the company. [6]

3 (c) Explain your treatment of adjustment (1) above, citing relevant accounting principles adopted. [4] Additional information During a recent board meeting, Mr Lim, a newly appointed director proposed changing depreciation method on property and plant from reducing balance method to the straight line method. REQUIRED (d) Advise Mr Lim about his proposal. Justify your answer with relevant accounting concepts. [3] [Total : 20]

4 2. Strategic Marine Ltd, an importer of nautical equipment, supplies maritime companies with such equipment. An inexperienced accountant who was recently hired produced the following. Balances at 1 January 2020 $$000 Non-current assets at cost 400 Accumulated depreciation 84 Prepaid general expenses 10 Inventory 45 Trade receivables 66 Trade payables 120 A summary of its bank account for the last 4 months ended 30 April 2020 is provided. Jan Feb Mar Apr Receipts $000 $000 $000 $000 Cash Sales 76 84 78 38 Credit Sales 66 228 252 234 Disposal of non-current assets - - - 15 Long term loan - 110 - - 142 422 330 287 Payments Payment for credit purchases 120 350 210 85 General expenses 29 45 30 - Dividends 20 30 - 27 169 425 240 112 Net cash flow (27) (3) 90 175 Opening balance 85 58 55 145 Closing balance 58 55 145 320 Additional information 1. 25% of monthly sales are cash sales and credit sales are on one month’s credit terms. 2. Purchases are on one month’s credit terms. Inventory of $130 000 was bought on credit on 18 April 2020. 3. The long term loan which was taken on 1 February 2020, bears an interest rate of 8% per annum. 4. Depreciation is provided for on the cost of all non-current assets at 2% per month. 5. Non-current assets costing $75 000 with an accumulated depreciation of $65 000 was sold in April. No depreciation is provided in the month of sale. 6. An inventory count on 30 April revealed inventory costing $90 000. REQUIRED (a) Prepare an income statement for Strategic Marine Ltd for the four months ended 30 April 2020. [6] (b) Prepare an extract of the Balance sheet as at 30 April 2020 , showing only the sections relevant for working capital for Strategic Marine Ltd. [6]

5 Additional information A director made this comment - “The management of the company’s working capital is quite good. This is evident from our current ratio, which is higher than industry standards of 2.80 : 1”. Our working capital should also not only surpass industry standards, but it should always be kept as high as possible. REQUIRED (c) Compute the current ratio to two decimal places for Strategic Marine Ltd and explain its meaning to the company. [2] (d) Advise the director regarding his comments on the company’s working capital. [4] (e) State 2 reasons why the current ratio of Strategic Marine Ltd could differ from industry standards? [2] [Total : 20]

6 3. AB Ltd makes its accounts to 31 March yearly and had been experiencing several years of difficult trading conditions. At 1 April 2020 it had the following issued share capital and reserves. $’000 200 000 8% Preference shares $1 each 200 800 000 Ordinary shares $0.50 each 400 Retained losses (165) At that date AB Ltd also had $600 000 of 10% debentures. The following information was provided by the directors for the next year: 1. On 1 June 2020, the directors agreed to revalue its property by $900 000 to reflect its increased value in the books. 2. On 1 September 2020 AB Ltd completed a 2 -for-1 bonus issue of ordinary shares, keeping reserves in their most flexible form. 3. On 1 October 2020 AB Ltd successfully completed a 3 -for-2 rights issue of ordinary shares at $0.40 per share on all ordinary shares in issue at that date 4. On 1 January 2021 AB Ltd redeemed $400 000 of the debentures as they were due. 5. Trading conditions improved and for the year ended 31 March 2021, AB Ltd made a net profit before interest of $318 000. In addition to paying its preference dividend, it declared an ordinary dividend of 2 cents per share on all outstanding shares at year end. REQUIRED (a) State two differences between a bonus issue and rights issue of shares. [2] (b) Prepare a statement of changes in equity for the year ended 31 March 2021. [8] Additional information The company is facing pressure from ordinary shareholders to increase their dividends and two directors, C and D have made proposals to increase the dividends. Director C proposes to distribute all remaining profits for the year as ordinary dividends. Director D proposes to transfer all gains from revaluation of its assets to net profit so as to report high