HGV 2022 Prelim P2 ANS

HillgroveSecondarySchool4E/5NAPreliminaryExamination2022Principlesof AccountsPaper 2(7087/02)Suggestedanswersandmarkingscheme Q1(a) SedapPteLtdStatementofFinancial Performancefortheyearended30June2022$ $Salesrevenue 900000 Less:Salesreturns (7000)Netsalesrevenue 893000Less:Costofsales (795000)Grossprofit 98000Add:OtherincomeServicefeeincome 12000(1)Discountreceived 100(1) 12100Less:OtherexpensesDiscountallowed 200(1)Rentexpense(-2/3x$9000) 29000(1)Utilitiesexpense 4900Wagesandsalariesexpense 38500Depreciationexpense:officeequipment(10%x$30000) 3000(1)motorvehicles[25%x($90000-$22500)] 16875(1)Reversal ofimpairmentlossontradereceivables(1) (160) (1)[(3%x$8000)-$400]Interestexpense(3/12x2%x$24000) 120 (92435)Profitfortheyear 17665[9m] Page1of 6

(b) SedapPteLtdStatementofFinancial Positionasat30June2022Cost Accumulated NetbookAssets depreciation valueNon-currentassetsOfficeequipment 30000 9000 21000Motorvehicles 90000 39375 50625Total Non-currentassets 71625(1)CurrentassetsCashatbank 10800 Tradereceivables 8000Less:Allowanceforimpairmentoftradereceivables (240) (3%x$8000)Nettradereceivables 7760Inventory 14800Servicefeeincomereceivable($12000-$10800) 1200(1)Prepaidrentexpense(2/3x$9000) 6000(1)Total currentassets 40560Total assets 112185EquityandLiabilitiesShareholders' equitySharecapital,10000ordinaryshares 20000(1)Retainedearnings($50450+$17665(1)*-$1000(1)**) 67115Total equity 87115Non-currentliabilitiesLong-termborrowings(-$4000) 20000(1)CurrentliabilitiesCurrentportionoflong-termborrowings(1) 4000(1)Interestexpensepayable 70Dividendspayable 1000(1)Total currentliabilities 5070Total equityandliabilities 112185 *OFbasedonprofit for theyear in(a)**OFbasedondividendspayableamount [11m] [Q1Total: 20m] Page2of 6

Q2(a)Costofpurchases=$7000+$100+$490+$200+$900=$8690[1m] (b) InthebooksofDurianQueenInventory Dr($) Cr($) Bal ($)2022 Jan1 Bal b/d 480 DrJan5 Tradepayable:FruitsKing 500(1) 980 Jan10 Costofsales(1) 480(1) 500 DrFeb1 Bal b/d 500 Dr (1)* *OF[4m] (c) InthebooksofDurianQueenJournalDate Particulars Dr($) Cr($)2022 Mar31 Impairmentlossoninventory 750(1) Insuranceclaimreceivable 250(1) Inventory 1000(1) [3m] (d)Theprudencetheory[1m]statesthattheaccountingtreatmentchosenshouldbetheonethatleastoverstatesassetsandprofitsandleastunderstatesliabilitiesandlosses[1m].Thus,inventoryshouldbevaluedatthelowerofcostornetrealisablevalueonstatementoffinancial positiontoensurethatinventory(whichisacurrentasset)isnotoverstated[1m]. (e)Salesrevenueandcostofsales[1m]Note: Bothaccountsmust becorrect tobeawarded1m. [Q2Total: 12m] Q3(a)Claimbytheowner(s)onthenetassetsofabusiness. [1m] (b)On12December2020,owner(orMugum)contributed$7000tothebusinessbankaccount. [1m] (c)Mugum’sbusinessmadealossof$3000fortheyearended31October2021andthisamountwastransferredtothecapital accounton31October2021. [1m] (d) InthebooksofMugum’sbusinessJournalDate Particulars Dr($) Cr($)2021 Oct31 Capital 240 Drawings 240 [2m] Page3of 6

(e)Liquidityistheabilityofabusinesstoconvertitscurrentassetsintocashtopayitscurrentliabilities.ORLiquiditymeasurestheabilityofabusinesstomeetitsshort-termfinancial obligations.[1m] Workings(f)(i)Workingcapital=Currentassets–Currentliabilities=$138720-$41300=$97420[1m] (f)(ii)Currentratio=Currentassets/Currentliabilities=$138720/ $41300=3.36[1m] (f)(iii)Quickratio=Quickassets/Currentliabilities=$40000/$41300=0.97[1m] (g)1mforeachpoint.Awardupto8marks.Point1 Workingcapital improvedfrom$38900in2019to$47800in2020,andto$97420in2021. 2 Thisseeminglyimpliedthatliquidityimprovedoverthethreeyears.3 Currentratioimprovedfrom3.15in2019to3.25in2020,andto3.36in2021.However,quickratioworsenedfrom2.60in2019to2.22in2020,andto0.97in2021.4 Sincequickratioisastricter indicator of liquidityascomparedtocurrent ratio,liquidityworsenedoverthethreeyears.5 Moreover,quickratiowaslessthan1in2021.Thisindicatedthatthebusinesshadinsufficient quickassetstopayoff itscurrent liabilitiesandwasprobablyexperiencingcashflowproblemin2021. Reasonsforworseningliquidity:6 Inventoryholdingsworsenedfrom$10000in2019to$22000in2020,andto$98720in2021.7 Thismaymeanthat increasingamount of fundsaretiedupinunsoldinventory.8 Tradereceivablespositionworsenedfrom$27000in2019to$30000in2020,andto$40000in2021.9 Thismaymeanthat fundsarelessreadilyavailable.10 Cashatbankbalanceworsenedfrom$20000in2019to$17000in2020,andtobankoverdraftof$9000in2021.11 Cashmayhavebeenusedoverthethreeyearstopurchasenon-currentassetsasshownfromtheincreaseinnon-currentassetsnetbookvaluefrom$50000in2019to$70000in2020,andto$180000in2021.12 Tradepayablespositionworsened from$18000in2019to$21000in2020,andto$27000in2021.13 Itmightbecomeincreasinglydifficultforthebusinesstoobtaincredit for futurepurchases.14 $5000oflong-termborrowingshasnowbecomecurrentasthestatuschangedfrombeingdueinover1yeartofallingduewithinthenext 12months. [8m] [Q3Total: 17m] Page4of 6

Q4(a)Abusinessisassumedtohaveanindefiniteeconomiclifeunlessthereiscredibleevidencethatitmayclosedown. [1m] (b)Revenueisearnedwhengoodshavebeendeliveredorserviceshavebeenprovided.[1m] (c)Atransactionisconsideredmaterial ifitmakesadifferencetothedecision-makingprocess. [1m] (d)Inasoleproprietorship, thesoleowner caneasilytransfer ownershipbyupdatingthecorporateregulatoryauthoritywiththeparticularsofthenewowner.However,inalimitedliabilitypartnership, all partnersneedtoagreetotheadditionorwithdrawal ofpartner(s)beforethecorporateregulatoryauthoritywill acknowledgethetransfer ofownership. [1m] Page5of 6

(e)1meachforeachpoint. Decision Isaacshouldsetupalimitedliabilitypartnership(LLP)withhisrelatives. Reason1 Isaac’sonlyexpertiseisintheteachingofArtandhehopestomakeall thedecisionsregardingthecontentanddeliveryoftheArtlessons.Moreover,hehasrelativeswhoareprofessionalsinotherareasofbusiness.Elaboration1 Thus,bysettingupaLLPwithhisrelatives,Isaaccanbeinchargeofthecurriculumwhilehisrelativesmanagetheotheraspectsofthebusinesssincecontrol will besharedbetweenIsaacandhisrelatives. Reason2 $20000isinsufficienttostartanArtenrichmentcentre.Elaboration2 Thus,bysettingupaLLPwithhisrelatives,Isaaccanovercomeshortageofcapital bygettinginterestedrelativestojoinaspartnersandcontributecapital.Ifthecapital isstill notenough,itshouldnotbedifficultforthebusinesstogetabankloan. Reason3 Isaacwouldlikehischildrentorunthebusinesstogetherwithhiminfuture.Elaboration3 Thus,bysettingupaLLPwithhisrelatives,Isaac’schildrencanrunthebusinesstogetherwithhimbybeingaddedaspartners,aslongasall therelativesinvolvedagreetotheaddition. or Decision Isaacshouldsetupaprivatelimitedcompany(PLC). Reason1 Isaac’sonlyexpertiseisintheteachingofArtandhehopestomakeall thedecisionsregardingthecontentanddeliveryoftheArtlessonsElaboration1 Thus,IsaaccansetupaPLCandappointhimselftobepartofthemanagementteamtobeinchargeofthecurriculum.ThePLCcanhireprofessionalstomanageotheraspectsofthebusinessthatIsaachasnoexperiencein. Reason2 IsaachopestosetupmanyArtenrichmentcentreswhichwill requirealotoffunds.Elaboration2 Thus,bysettingupaPLC,Isaac’sexpansionplancanbefundedbyissuingadditional sharesorgettingabankloan. Reason3 Duetofamilyfinancial commitments,Isaacisnotabletotakeonanybusinessdebtsorlosses.Elaboration3 Thus,bysettingupaPLC,Isaacwill notneedtosell offhisprivateinvestmentsshouldthebusinessincurdebtsorlossesashewill notbepersonallyliableandonlystandtolosehisinitial investmentof$20000. [7m] [Q4Total: 11m] Page6of 6