MI 2021 Prelims P2

Candidate Name: Class:_____________ This question paper consists of 8 printed pages and 1 blank page. [Turn over 2021 Preliminary Examination Pre-university 3 PRINCIPLES OF ACCOUNTING 9593/2 20 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 directors of Brown Ltd are deciding between investing in two equipment, Equipment P and Equipment Q to expand the company. Equipment P has an initial cost of $500 000 and further details are given below: Year $ Expected profit 1 160 000 Expected profit 2 150 000 Expected profit 3 80 000 Expected profit 4 60 000 Expected profit 5 40 000 Estimated value of proceeds of sale of equipment P at the end of year 5 50 000 Additional Information 1. Profits as given above have been calculated after deducting straight line depreciation calculated over the five years. 2. The company’s cost of capital is 12%. The relevant discount table is shown below. End of Year Discount factor 1 0.893 2 0.797 3 0.712 4 0.636 5 0.567 REQUIRED (a) Calculate the payback period in years and months for Equipment P. [3] (b) Calculate the net present value for Equipment P. [6] Additional Information The directors have calculated the following for Equipment Q. Initial cost $600 000 Payback period 2 years 9 months Net present value $240 000 (c) Advise the company which Equipment they should buy. Justify your answer. [5] (d) State two limitations of capital investment analysis. [2]

3 Additional Information To fund another investment, the directors are considering to raise $200 000 from the capital markets through $1 ordinary shares and unsecured loans. The returns required by investors at two different levels of gearing are as follows: Percentage of capital to be raised by loans $1 ordinary shares Unsecured loans 40% 14% 12% 60% 16% 18% REQUIRED (e) Calculate the cost of capital at each level of gearing. [4] [Total: 20]

4 2 Mr Black runs a business that makes products from a single raw material, Zox which he buys from a supplier. He has prepared the sales budgets for the months of July to October 2022. Sales units July 20 000 August 26 000 September 28 000 October 38 000 At 30 June, there will be 3 000 units of the finished goods in stock. For finished goods