MI 2020 Prelim Paper 1 Answer Guide

1 2020 Preliminary Examination Paper 1 Question 1 (a) Non-current assets are valued at cost less depreciation to date / Accumulated depreciation Net book value (b) Non-current assets will be shown in the balance sheet at the revised / revaluation value. Any increase in value due to revaluation represents a capital reserve /Asset Revaluation Reserve . Future net book value / carrying value will be recalculated / adjusted on revised depreciation (c) Perfect 10 Pte Ltd Draft balance sheet as at 31 December 2019 $ $ $ $ Non-current assets Cost/ Valuation Accumulated depreciation Net book value Property at valuation 510 000 510 000 Office equipment 106 000 54 000 52 000 Total non-current assets 616 000 54 000 562 000 Current assets Inventories 116 590 Trade receivables 13 750 Less: Allowance for impairment of trade receivables (2 250) 11 500 Cash in hand 24 771 152 861 714 861 Equity and liabilities Shareholders capital and reserves 150 441* Asset revaluation reserve (510-140) 370 000 Total equity 520 441 Non-current liabilities Long-term loan 75 000 Total non-current liabilities 75 000 Current liabilities Trade payables 87 100 Short term borrowings/ bank overdraft 32 320 Total current liabilities 119 420 Total equity and liabilities 714 861

2 (d) (i) Capital reserves are available for distribution as bonus issue only Company cannot issue cash dividends from capital reserves (ii) Solvency: Quick assets (11 500 + 24 771) $36 271 are less than current liabilities $119 420 Quick ratio is 0.3:1/ below 1:1/ is unable to meet current liabilities Decision is NOT to pay dividends Decision rationale: either insufficient cash /or bank overdraft / or incorrect usage of capital reserves Allow answers based upon own figures. Question 2 (a) General Journal Date Account name Debit Credit $ $ 2 Cash at bank 67 068 Trade receivables 67 068 3 Wages 60 750 Cash at bank 60 750 4 Inventory *(97.5% X 38 600) 37 635 Cash at bank* 37 635 5 Cash in hand 5 000 Cash at bank 5 000 Marks are one for both correct narratives and figures except where indicated* (b) Computation of updated cash at bank balance as at 30 June 2020. $ Opening cash at bank balance(1) (23 475) Receipts from Trade receivables (2) 67 068 Wages paid (3) (60 750) Inventory purchased with cash (4) (37 635) Transfer to cash in hand (5) (5 000) (59 792) Accept alternative presentation of the answer.

3 (c) (i) 1. No adjustment. 2. No adjustment. 3. No adjustment. 4. Invalid cheque $40 070 needs deducting from bank as debtor has technically not paid 5. Overdraft interest has been charged by bank therefore needs deducting from the account 6. Deduction of $5 000 to bank account to correct company accounting error. Computation of the updated cash at bank account and the balance being held by the bank. $ Opening cash at bank balance (59 792) Dishonoured cheque (4) (40 070) Bank interest (2 167) Overstated receipt correction (5 000) Closing cash at bank balance (107 029)* (ii) Reconciliation of updated cash at bank with bank statement balance $ Balance as per updated cash at bank (Part c) (107 029) Add: Cheques not yet presented 17 435 Correction of error made by bank 9 525 (80 069) Less: Receipts value not yet received (65 010) Estimated balance on the bank statement (145 079) Accept alternative formats (d) Reasons reconciliation are produced: Provide a separate / independent check on entries in the cash at bank account Identifies and errors or omissions between bank and company account. Reduces the risk of fraud being carried out To ensure the correct amount of cash at bank is included in the financial statements. To ensure that discrepancies are due to timing. (e) Decision to amend overdraft limit: The existing overdraft limit will exceed by $25 079 The company need to ask for an increased overdraft of $120 000 + 25 079 = $145 079

4 Question 3 (a) Annual interest = 350 000 X (6/100) = $21 000 (if capital repayments are made at end of year one) Note: Average annual interest on 6% loan = (350 000 + 315 000) / 2 X 6/100 = $19 950 (if capital repayments made monthly over the year) (b) Statement of changes in equity for the year ended 31 December 2021 Share capital Retained earnings Asset revaluation Total $ $ $ $ Beginning balance 3 000 000 1 700 000 1 000 000 5 700 000 Changes in equity for the year Issue of share capital 400 000 400 000 Profit for the year (800 000 – 21 000) 779 000 779 000 Dividends (510 000) (510 000) Ending balance 3 400 000 1 969 000 1 000 000(1) 6 369 000 (c) Debt to equity ratio given is : Total liabilities / Equity Total liabilities = (Long term loan + Mortgage + Short term borrowings + Trade payables) $350 000 + $750 000 (1m for LTL)+ $2 400 000 + ($1 200 + $150)(1m for CL) = $4 850 000 Equity (own figure from (b) above) - $6 369 000 Debt to equity = $4 850 000 / $6 369 000 = 0.7615 or 0.76 (d) Interest $21 000 has to be paid / interest to be paid annually. Profits will be reduced Reduced profits will mean less profit available for distribution for use of dividends or retained earnings for shareholders. Higher risk of not being able to settle interest & debt (Gearing ratio) (e) Alternative funding option: Ordinary shares held 3 400 000 / 8 = 425 000 rights shares issued New dividend is 3 825 000 shares X $0.14 = $535 500 Original dividend cost: $510 000 ( see answer in (b)) Additional cost + $25 500 If additional cost more than interest; $21 000 (see answer in (a)) REJECT Or less than interest charge (see answer in (a)) ACCEPT Mark awarded only if clear decision made and linked to calculation.

5 4(a) [Total: 10m] Solid Pte Ltd Statement of cash flows for the year ended 30 August 2020 $’000 $’000 Cash flows from operating activities Net profit for the year before interest (2644 + 547) 3 191 Adjustments for: Depreciation Gain on sale of property, plant and equipment 2 638* (273)* Operating cash flows before movements in working capital 5 556 Increase in inventories (988)** Decrease in trade receivables 146** Increase in trade payables 161** (681) Net cash provided by operating activities 4 875 Cash flows from investing activities Purchase of non-current assets (13350+142-335-2638-19193) (8 674) Proceeds from sale of non-current assets (335+273-142) 466 Net cash used in investing activities (8 208) Cash flows from financing Activities Proceeds from issuance of shares 2 000* Proceeds from borrowings 3 400* Interest paid (547) Net cash provided by financing activities 4 853 Net increase in cash and cash equivalents 1 520 Cash and bank balance at start of the year (113 -1 294) (1 181) Net increase in cash and cash equivalents 1 520 Cash and bank balance at end of year 339 4(b) The statement shows a POSITIVE CASH flow generated from operations / Positive cash flow indicates a successful trading company The company is making major investment in non-current assets/ Significant as investment has increased by $8 208 000 ($8 674 000-466 000) The company’s long-term investment has been funded by: Increased share capital $2 000 000 Increased long-term borrowings $3 400 000 The surplus of approximately $1.5m is available to improve liquidity From a bank overdraft of $1.294m to a positive bank balance of $272 000 The surplus may be available for extra non-current assets/