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This resource material provides teachers with examples of graded assignments for

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according to the diverse learning needs of students if deemed necessary.

(2)

Elementary level: Page 1 Graded Assignment: Accounting for Limited Company

Elementary Level - Question Paper

(A) State the differences between ordinary shares and debentures in terms of:

(1) nature of capital; and

(2) financial burden on the limited company. (2 marks) (B) Below is the trial balance of Alpha Limited as at 31 March 2021:

Dr Cr

$ $

Office equipment 2,500,000

Accumulated depreciation – office equipment, 1 April 2020 1,080,000

Inventory, 1 April 2020 190,000

Allowance for doubtful accounts, 1 April 2020 50,000

Purchases and Sales 500,000 2,150,000

Administrative, selling and distribution expenses 415,800

Ordinary share dividends 200,000

Debenture interest 18,000

4% Debentures 900,000

Ordinary share capital 3,500,000

Cash at bank 5,011,200

General reserve 80,000

Retained profits, 1 April 2020 120,000

Trade receivables and Trade payables 250,000 35,000

Share applications 1,170,000

9,085,000 9,085,000

Additional information:

(i) On 1 March 2021, the company issued 30,000 ordinary shares at $26 each. Applications had been received for 45,000 ordinary shares and it was decided to allot the shares on the basis of two shares for every three shares subscribed. The shares had been allotted on 31 March 2021, but no entries were made for this. The excess application monies would be refunded on 7 April 2021.

(ii) The following administrative expenses were to be paid in April 2021:

- Directors’ fees of $120,000 - Audit fees of $30,000

(iii) Estimated profits tax amounted to $85,000 had not yet been recorded in the books.

(iv) It is the company’s policy to depreciate its non-current assets on a reducing balance basis at a rate of 15% per annum and to classify the depreciation expenses as administrative expenses.

(v) The 4% debentures were issued on 1 July 2020 with maturity date on 30 June 2023 and the debenture interest is payable at the end of each quarter.

(3)

Elementary level: Page 2 (vi) On 28 March 2021, there was a fire in the warehouse and inventory costing $30,000 was destroyed. The insurance company agreed to compensate the business for 60% of the inventory destroyed. No entries were made in the books. After the physical inventory count on 31 March 2021, the inventory was valued at $100,000. Part of the closing inventory costing $15,000 was slightly damaged and could only be sold for $3,450 after paying repair fee of $500. Closing inventory had not been adjusted for this.

(vii) On 29 March 2021, one of the customers who had owed the company $40,000 had declared bankruptcy. The company decided to write off the debt but no entries were made in the books. An allowance for doubtful accounts of 5% on trade receivables was to be provided on 31 March 2021.

(viii) On 31 March 2021, the board of directors resolved to transfer $50,000 to general reserve.

(ix) During the year, ordinary share dividends of $200,000 was declared and paid. Final dividend of $2 per share was to be declared in May 2021.

REQUIRED:

Prepare for Alpha Limited,

(a) an income statement for the year ended 31 March 2021, showing separately destroyed inventory value, profit before tax and profit after tax. (6 marks)

(b) a statement to calculate the retained profits as at 31 March 2021. (2 marks)

(c) a statement of financial position as at 31 March 2021. (8 marks)

(Total: 18 marks)

(4)

Elementary level: Page 3 Graded Assignment: Accounting for Limited Company

Elementary Level – Student Worksheet (A) *Circle the correct answers in the following table.

Differences between ordinary shares and debentures:

Ordinary shares Debentures

Nature of capital

(Share / Loan)* capital reported under

(Equity / Liabilities)* part in the statement of financial

position

(Share / Loan)* capital reported under

(Equity / Liabilities)* part in the statement of financial

position

Financial burden on the limited company

(Interest / Dividend)*

at a

(fixed / variable)* rate

(Interest / Dividend)*

at a

(fixed / variable)* rate

(B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales

Less: Cost of goods sold Opening inventory Add: Purchases

Less: Destroyed inventory (item vi)

Less: Closing inventory (W1)

Gross profit Less: Expenses

Administrative, selling and distribution expenses (W2) Inventory

destroyed in a fire should be deducted

(5)

Elementary level: Page 4 Inventory loss (W4)

Debenture interest (W5)

Profit before tax Less: Profits tax Profit after tax

W1: The application of lower of cost and net realisable value (NRV):

If NRV > Cost, inventory is valued at cost. No adjustment is required.

If Cost > NRV, inventory is valued at NRV. Inventory value should be written down.

Step 1: Find out the cost and the NRV of the inventory slightly damaged

 Cost = $15,000

 NRV = Estimated selling price – Estimated necessary costs to complete and make the sales

= $__________ - $__________ = $__________

Step 2: Compare cost and NRV

As Cost > NRV, inventory is valued at $__________

Step 3: Write down the inventory value

Inventory value would be written down by $__________ – $__________ = $__________

Closing inventory value = $100,000 – $__________ = $__________

W2: Calculation of administrative, selling and distribution expenses

$

As per trial balance 415,800

Add: Directors’ fees (item ii) Audit fees (item ii)

Depreciation expenses $(__________ – __________) ×___% (item iv)

(6)

Elementary level: Page 5 Bad debts (item vii) (W3)

W3: Preparation of allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables Step 2 Balance b/d Step 1 50,000

Balance c/d Step 3

$(__________ – __________) ×____%

Bad debts Step 4

Steps to prepare an allowance for doubtful accounts

Step 1: State the Balance b/d on credit side of the account as the allowance for doubtful accounts is a contra asset account with a credit balance.

Step 2: Write off the uncollectible amount from the trade receivables account:

Dr Allowance for doubtful accounts Cr Trade receivables Step 3: Calculate the Balance c/d:

Balance c/d = Outstanding balance of trade receivables account × 5% [in this question]

Step 4: The balancing figure would be included in the income statement as bad debts expenses:

Dr Bad debts

Cr Allowance for doubtful accounts

W4 Item (vi): Inventory costing $30,000 was destroyed in a fire Uncollectible amount written

off on 29 March 2021

Inventory value destroyed in a fire (Deduct from purchases)

Amount covered by insurance (i.e. 60%) (Current assets: receivables)

Amount not covered by insurance (i.e. 40%) (Income statement: expenses)

(7)

Elementary level: Page 6 Inventory loss to be included as expenses in the income statement:

$_____________ × _____% = $_____________

W5: Calculation of debenture interest for the year ended 31 March 2021 $ As per trial balance – Debenture interest for 6 months 18,000 Add: Accrued interest for 3 months $900,000 × 4% × _________

(b)

Alpha Limited

Statement to calculate the retained profits as at 31 March 2021

$ $

Retained profits, 1 April 2020 (from trial balance) Add: Profit after tax (answer from (a))

Less: Transfer to general reserve (item viii)

Ordinary share dividends (item ix) (declared in current financial period)

Retained profits, 31 March 2021

(c)

Alpha Limited

Statement of financial position as at 31 March 2021

$ $ $

ASSETS

Non-current assets

Office equipment, net ($2,500,000 – __________ – __________) Current assets

Inventory ($100,000 – __________ (W1))

Trade receivables ($250,000 – __________ (item vii)) Less: Allowance for doubtful accounts

$(__________ – __________) ×____%

1 Jan 2021 – 31 Mar 2021 1 Jul 2020 – 31 Dec 2020

Write off the uncollectible amount

Reported as Liabilities in the statement of financial position

NBV = Cost – Accumulated depreciation

(8)

Elementary level: Page 7 Insurance compensation receivables ($__________ ×___%) (item vi)

Cash at bank Total assets

EQUITY AND LIABILITIES Shareholder’s Equity

Ordinary share capital [$___________ + ($______ × ___________)(item i)]

General reserve $(80,000 + __________ (item viii)) Retained profits (answer from (b))

Non-current liabilities _____ Debentures

Current liabilities Trade payables

Share applications refundable

[(___________ - ___________) × $______] (item i) Tax payable (item iii)

Accrued administrative expenses $(________ +________) (item ii) Accrued debenture interest (W5)

Total equity and liabilities

Original share capital + (issue price x newly issued number of share)

(number of shares subscribed – number of shares issued) × issue price

(9)

Elementary level: Page 8 Graded Assignment: Accounting for Limited Company

Elementary Level – Suggested Solution and Explanatory Notes (A) Differences between ordinary shares and debentures.

Ordinary shares Debentures

Nature of capital

(Share / Loan) * capital reported under

(Equity / Liabilities)* part in the statement of financial

position

(Share / Loan)* capital reported under

(Equity / Liabilities)* part in the statement of financial

position

Financial burden on the limited company

(Interest / Dividend)*

at a

(fixed / variable)* rate

(Interest / Dividend)*

at a

(fixed / variable)* rate

(B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales 2,150,000

Less: Cost of goods sold

Opening inventory 190,000

Add: Purchases 500,000

Less: Destroyed inventory (item vi) 30,000

Less: Closing inventory (W1) 87,950 572,050

Gross profit 1,577,950

Less: Expenses

Administrative, selling and distribution expenses (W2) 779,300

Inventory loss (W4) 12,000

Debenture interest (W5) 27,000 818,300

Profit before tax 759,650

Less: Profits tax 85,000

Profit after tax 674,650

Inventory damaged in a fire should be deducted from purchases

Inventory value would be written down in the cost of goods sold after applying the “lower of cost and NRV”

(10)

Elementary level: Page 9 W1: The application of lower of cost and net realisable value (NRV)

If NRV > Cost, inventory is valued at cost. No adjustment is required.

If Cost > NRV, inventory is valued at NRV. Inventory value should be written down.

Step 1: Find out the cost and the NRV of the inventory slightly damaged

 Cost = $15,000

 NRV = Estimated selling price – Estimated necessary costs to complete and make the sales

= $(3,450 - 500) = $2,950 Step 2: Compare cost and NRV

 As Cost > NRV, inventory is valued at $2,950 Step 3: Write down the inventory value

 Inventory value would be written down by $15,000 – $2,950 = $12,050

 Closing inventory value = $100,000 – $12,050 = $87,950

W2: Calculation of administrative, selling and distribution expenses for the year ended 31 March 2021

$

As per trial balance 415,800

Add: Directors’ fees (item ii) 120,000

Audit fees (item ii) 30,000

Depreciation expenses (item iv) [$(2,500,000 – 1,080,000) × 15%] 213,000

Bad debts (item vii) (W3) 500

779,300

W3: Preparation of allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables (Step 2) 40,000 Balance b/d (Step 1) 50,000 Balance c/d (Step 3)

$(250,000 – 40,000) × 5%

10,500 Bad debts (Step 4) 500

50,500 50,500

Closing inventory value => Cost of goods sold

Step 1: State the balance b/d on the credit side Step 2: Write off the uncollectible

amount from trade receivables account

Step 3: Calculate the balance c/d based on the given percentage and

outstanding trade receivables account balance

Step 4: The balancing figure included in the income statement as bad debts expenses

(11)

Elementary level: Page 10 W4: Inventory loss in income statement:

$30,000 × 40% = $12,000

(Only the amount not covered by insurance should be included as expenses.)

W5: Calculation of debenture interest for the year ended 31 March 2021

As per trial balance – Debenture interest for 6 months 18,000 Add: Accrued interest for 3 months ($900,000 × 4% × 3/12) 9,000 27,000

(b)

Alpha Limited

Statement to calculate the retained profit as at 31 March 2021

$ $

Retained profits, April 1 2020 (from trial balance) 120,000

Add: Profit after tax (answer from (a)) 674,650

794,650 Less: Transfer to general reserve (item viii) 50,000

Ordinary share dividends (item ix) 200,000 250,000

Retained profits, March 31 2021 544,650

(c)

Alpha Limited

Statement of financial position as at 31 March 2021

$’000 $’000 $’000

ASSETS

Non-current assets

Office equipment, net $(2,500,000 – 1,080,000 – 213,000 (item iv)) 1,207,000 Current assets

Inventory $(100,000 – 12,050 (item vi)) 87,950

Trade receivables $(250,000 – 40,000 (item vii)) 210,000

Less: Allowance for doubtful accounts (W3) 10,500 199,500 Insurance compensation receivables (item vi)($30,000 × 60%) 18,000

Cash at bank 5,011,200 5,316,650

Total assets 6,523,650

Debenture interest is calculated for 9 months from 1 Jul 2020 – 31 Mar 2021

Double entries for writing off the uncollectible amount from the trade receivables account Dr Allowance for doubtful accounts $40,000 Cr Trade receivables $40,000

(12)

Elementary level: Page 11 EQUITY AND LIABILITIES

Shareholder’s Equity

Ordinary share capital [$3,500,000 + ($26 × 30,000) (item i)] 4,280,000

General reserve $(80,000 + 50,000) 130,000

Retained profits (answer from (b)) 544,650

4,954,650

Non-current liabilities

4% Debentures 900,000

Current liabilities

Trade payables 35,000

Share applications refundable (item i) (45,000 – 30,000) × $26 390,000

Tax payable (item iii) 85,000

Accrued administrative expenses $(120,000 +30,000) (item ii) 150,000

Accrued debenture interest (item v) (W5) 9,000 669,000

Total liabilities and equity 6,523,650

Allotment of 30,000 ordinary shares Dr Share applications $780,000 Cr Ordinary share capital $780,000 (30,000 x $26)

Oversubscribed application monies to be refunded:

Dr Share applications $390,000

Cr Share applications refundable $390,000

(13)

Elementary level: Page 12 Points to note:

Different scenarios of share subscription

Full subscription Over-subscription

No. of shares subscribed = No. of share issued No. of shares subscribed > No. of share issued Accounting treatment: Step 1 & 2 Accounting treatment: Step 1 - 3

Step 1: Receive monies from applicants Dr Cash at bank

Cr Share applications

(No. of shares subscribed × issue price per share) Step 2: Allot ordinary shares to successful

applicants

Dr Share applications

Cr Ordinary share capital

(No. of shares issued × issue price per share) Step 3: Refund monies to unsuccessful

applicants

(over-subscription)

Dr Share applications

Cr Cash at bank / Share applications refundable [(No. of shares subscribed – no. of shares issued) × issue price per share]

Common mistakes:

1. Mixed up the accounting treatments for dividends declared during the financial period and after the financial period.

2. Failed to include the correct amount of loss on destroyed inventory (i.e. the uncompensated amount) in the income statement.

3. Mistakenly treated the reduction in value of slightly damaged inventory as an expense in the income statement.

(14)

Standard level: Page 1 Graded Assignment: Accounting for Limited Company

Standard Level - Question Paper

(A) State the differences between ordinary shares and debentures in terms of:

(1) nature of capital; and

(2) financial burden on the limited company. (2 marks) (B) Below is the trial balance of Alpha Limited as at 31 March 2021:

Dr Cr

$ $

Office equipment 2,500,000

Accumulated depreciation – office equipment, 1 April 2020 1,080,000

Inventory, 1 April 2020 190,000

Allowance for doubtful accounts, 1 April 2020 50,000

Purchases and Sales 500,000 2,150,000

Administrative, selling and distribution expenses 415,800

Ordinary share dividends 200,000

Debenture interest 18,000

4% Debentures 900,000

Ordinary share capital 3,500,000

Cash at bank 5,011,200

General reserve 80,000

Retained profits, 1 April 2020 120,000

Trade receivables and Trade payables 250,000 35,000

Share applications 1,170,000

9,085,000 9,085,000

Additional information:

(i) On 1 March 2021, the company issued 30,000 ordinary shares at $26 each. Applications had been received for 45,000 ordinary shares and it was decided to allot the shares on the basis of two shares for every three shares subscribed. The shares had been allotted on 31 March 2021, but no entries were made for this. The excess application monies would be refunded on 7 April 2021.

(ii) The following administrative expenses were to be paid in April 2021:

- Directors’ fees of $120,000 - Audit fees of $30,000

(iii) Estimated profits tax amounted to $85,000 had not yet been recorded in the books.

(iv) It is the company’s policy to depreciate its non-current assets on a reducing balance basis at a rate of 15% per annum and to classify the depreciation expenses as administrative expenses.

(v) The 4% debentures were issued on 1 July 2020 with maturity date on 30 June 2023 and the debenture interest is payable at the end of each quarter.

(15)

Standard level: Page 2 (vi) On 28 March 2021, there was a fire in the warehouse and inventory costing $30,000 was destroyed. The insurance company agreed to compensate the business for 60% of the inventory destroyed. No entries were made in the books. After the physical inventory count on 31 March 2021, the inventory was valued at $100,000. Part of the closing inventory costing $15,000 was slightly damaged and could only be sold for $3,450 after paying repair fee of $500. Closing inventory had not been adjusted for this.

(vii) On 29 March 2021, one of the customers who had owed the company $40,000 had declared bankruptcy. The company decided to write off the debt but no entries were made in the books. An allowance for doubtful accounts of 5% on trade receivables was to be provided on 31 March 2021.

(viii) On 31 March 2021, the board of directors resolved to transfer $50,000 to general reserve.

(ix) During the year, ordinary share dividends of $200,000 was declared and paid. Final dividend of $2 per share was to be declared in May 2021.

REQUIRED:

Prepare for Alpha Limited,

(a) an income statement for the year ended 31 March 2021, showing separately destroyed

inventory value, profit before tax and profit after tax. (6 marks) (b) a statement to calculate the retained profits as at 31 March 2021. (2 marks)

(c) a statement of financial position as at 31 March 2021. (8 marks)

(Total: 18 marks)

(16)

Standard level: Page 3 Graded Assignment: Accounting for Limited Company

Standard Level – Student Worksheet

(A) Differences between ordinary shares and debentures. Fill in the blanks for the following sentences.

1. Ordinary shares are (1) ____________ capital and are reported under the (2) ___________ part in the statement of financial position. Debentures are (3) ____________ capital and are reported as (4) _____________ in the statement of financial position.

2. The limited company pays ordinary shareholders (5) _____________ at a (6)____________ rate but pays debenture holders (7) ____________ at a (8) ____________ rate.

(B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales

Less: Cost of goods sold Opening inventory Add: Purchases

Less: Destroyed inventory (item vi)

Less: Closing inventory (W1)

Gross profit Less: Expenses

Administrative, selling and distribution expenses (W2)

Inventory loss (W4)

Debenture interest (W5)

Profit before tax Less: Profits tax Inventory

destroyed in a fire should be

deducted

(17)

Standard level: Page 4 Profit after tax

W1: The application of lower of cost and net realisable value (NRV):

If NRV > Cost, inventory is valued at cost. No adjustment is required.

If Cost > NRV, inventory is valued at NRV. Inventory value should be written down.

Step 1: Find out the cost and the NRV of the inventory slightly damaged

 Cost = $15,000

 NRV = Estimated selling price – Estimated necessary costs to complete and make the sales

= $__________ - $__________ = $__________

Step 2: Compare cost and NRV

As Cost > NRV, inventory is valued at $__________

Step 3: Write down the inventory value

Inventory value would be written down by $__________ – $__________ = $__________

Closing inventory value = $100,000 – $__________ = $__________

W2: Calculation of administrative, selling and distribution expenses

$

As per trial balance 415,800

Add: Directors’ fees (item ii) Audit fees (item ii)

Depreciation expenses $(__________ – __________) ×___% (item iv) Bad debts (item vii) (W3)

Calculate the depreciation expenses based on reducing balance method as stated in the company’s policy.

(18)

Standard level: Page 5 W3: Preparation of allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables Step 2 Balance b/d Step 1 50,000

Balance c/d Step 3

$(__________ – __________) ×____%

Bad debts Step 4

W4 Item (vi): Inventory costing $30,000 was destroyed in a fire

Inventory loss to be included as expenses in the income statement:

$_____________ × _____% = $_____________

W5: Calculation of debenture interest for the year ended 31 March 2021 $ As per trial balance – Debenture interest for 6 months 18,000 Add: Accrued interest for 3 months $900,000 × 4% × _________

1 Jan 2021 – 31 Mar 2021

Uncollectible amount written off on 29 March 2021

1 Jul 2020 – 31 Dec 2020

Reported as Liabilities in the statement of financial position

Inventory value destroyed in a fire (Deduct from purchases)

Amount covered by insurance (i.e. 60%) (Current assets: receivables)

Amount not covered by insurance (i.e. 40%) (Income statement: expenses)

(19)

Standard level: Page 6 (B)(b)

Hint: Formula of calculating retained profit at the year end:

Retained profits brought forward Add: Profit after tax

Less: Transfer to reserves Share dividend

= Retained profits carried forward

* Prepare the statement to calculate retained profits with reference to the hints above.

$ $ $

(20)

Standard level: Page 7 (B)(c) Hint: Prepare necessary entries to facilitate the preparation of statement of financial

position

General journal

Dr ($) Cr ($)

(i) Share applications 1,170,000

________________________ ______________

(______________× $_______)

________________________ ______________

[(______________ - ______________) × $_______]

* Prepare the statement of financial position with reference to in the hints above.

$ $ $

ASSETS

Total assets

Share allotted to successful applicants Ordinary share capital (Number of shares issued × Issue price)

Share applications

Over-subscribed amount to be refunded Liabilities

(Number of shares subscribed – Number of shares issued) × Issue price

(21)

Standard level: Page 8 EQUITY AND LIABILITIES

Shareholders’ Equity

Ordinary share capital $(______________+_______________(i)) General reserve $(______________+_______________(viii))

Current liabilities

Share applications refundable (i)

Total equity and liabilities

(22)

Standard level: Page 9 Graded Assignment: Accounting for Limited Company

Standard Level – Suggested Solution and Explanatory Notes (A) Differences between ordinary shares and debentures:

1. Ordinary shares are (1) share capital and are reported under (2) equity part in the statement of financial position. Debentures are (3) loan capital and are reported as (4) liabilities part in the statement of financial position.

2. The company pays ordinary shareholders (5) dividend at a (6) variable rate but pays debenture holders (7) interest at a (8) fixed rate.

(B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales 2,150,000

Less: Cost of goods sold

Opening inventory 190,000

Add: Purchases 500,000

Less: Destroyed inventory (item vi) 30,000

Less: Closing inventory (W1) 87,950 572,050

Gross profit 1,577,950

Less: Expenses

Administrative, selling and distribution expenses (W2) 779,300

Inventory loss (W4) 12,000

Debenture interest (W5) 27,000 818,300

Profit before tax 759,650

Less: Profits tax 85,000

Profit after tax 674,650

W1: The application of lower of cost and net realisable value (NRV)

If NRV > Cost, inventory is valued at cost. No adjustment is required.

If Cost > NRV, inventory is valued at NRV. Inventory value should be written down.

Step 1: Find out the cost and the NRV of the inventory slightly damaged

 Cost = $15,000

 NRV = Estimated selling price – Estimated necessary costs to complete and make the sales

= $(3,450 - 500) = $2,950

Inventory damaged in a fire should be deducted from purchases

Inventory value would be written down in the cost of goods sold after applying the “lower of cost and NRV”

(23)

Standard level: Page 10 Step 2: Compare cost and NRV

 As Cost > NRV, inventory is valued at $2,950 Step 3: Write down the inventory value

 Inventory value would be written down by $15,000 – $2,950 = $12,050

 Closing inventory value = $100,000 – $12,050 = $87,950

W2: Calculation of administrative, selling and distribution expenses for the year ended 31 March 2021

$

As per trial balance 415,800

Add: Directors’ fees (item ii) 120,000

Audit fees (item ii) 30,000

Depreciation expenses (item iv) [$(2,500,000 – 1,080,000) × 15%] 213,000

Bad debts (item vii) (W3) 500

779,300

W3: Preparation of allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables (Step 2) 40,000 Balance b/d (Step 1) 50,000 Balance c/d (Step 3)

$(250,000 – 40,000) × 5%

10,500 Bad debts (Step 4) 500

50,500 50,500

W4: Inventory loss in income statement:

$30,000 × 40% = $12,000

(Only the amount not covered by insurance should be included as expenses.)

W5: Calculation of debenture interest for the year ended 31 March 2021

As per trial balance – Debenture interest for 6 months 18,000 Add: Accrued interest for 3 months ($900,000 × 4% × 3/12) 9,000 27,000 Closing inventory value => Cost of goods sold

Debenture interest is calculated for 9 months from 1 Jul 2020 – 31 Mar 2021

Step 1: State the balance b/d on the credit side Step 2: Write off the uncollectible

amount from trade receivables account

Step 3: Calculate the balance c/d based on the given percentage and

outstanding trade receivables account balance

Step 4: The balancing figure included in the income statement as bad debts expenses

(24)

Standard level: Page 11 (b)

Alpha Limited

Statement to calculate the retained profit as at 31 March 2021

$ $

Retained profits, 1 April 2020 120,000

Add: Profit after tax 674,650

794,650

Less: Transfer to general reserve 50,000

Ordinary share dividends 200,000 250,000

Retained profits, 31 March 2021 544,650

(c)

General journal

Dr ($) Cr ($)

(i) Share applications 1,170,000

Ordinary share capital 780,000

(30,000 × $26)

Share applications refundable 390,000

[(45,000 – 30,000) × $26]

Alpha Company Limited

Statement of financial position as at 31 March 2021

$’000 $’000 $’000

ASSETS

Non-current assets

Office equipment, net $(2,500,000 – 1,080,000 – 213,000 (iv)) 1,207,000 Current assets

Inventory $(100,000 – 12,050 (vi)) 87,950

Trade receivables $(250,000 – 40,000 (vii)) 210,000

Less: Allowance for doubtful accounts (vii) 10,500 199,500

Insurance compensation receivables (vi) 18,000

Cash at bank 5,011,200 5,316,650

Total assets 6,523,650

EQUITY AND LIABILITIES Shareholders’ Equity

Ordinary share capital $(3,500,000 + 780,000 (i)) 4,280,000

General reserve $(80,000 + 50,000 (viii)) 130,000

Retained profits 544,650

4,954,650 Non-current liabilities

4% Debentures 900,000

Current liabilities

(25)

Standard level: Page 12

Trade payables 35,000

Share applications refundable (i) 390,000

Tax payable (iii) 85,000

Accrued administrative expenses $(120,000 +30,000) (ii) 150,000

Accrued debenture interest (v) 9,000 669,000

TORAL EQUITY AND LIABILITIES 6,523,650

Points to note:

Different scenarios of share subscription

Full subscription Over-subscription

No. of shares subscribed = No. of share issued No. of shares subscribed > No. of share issued Accounting treatment: Step 1 & 2 Accounting treatment: Step 1 - 3

Step 1: Receive monies from applicants Dr Cash at bank

Cr Share applications

(No. of shares subscribed × issue price per share) Step 2: Allot ordinary shares to successful

applicants

Dr Share applications

Cr Ordinary share capital

(No. of shares issued × issue price per share) Step 3: Refund monies to unsuccessful

applicants

(over-subscription)

Dr Share applications

Cr Cash at bank / Share applications refundable [(No. of shares subscribed – no. of shares issued) × issue price per share]

Common mistakes:

1. Mixed up the accounting treatments for dividends declared during the financial period and after the financial period.

2. Failed to include the correct amount of loss on destroyed inventory (i.e. the uncompensated amount) in the income statement.

3. Mistakenly treated the reduction in value of slightly damaged inventory as an expense in the income statement.

(26)

Advanced level: Page 1 Graded Assignment: Accounting for Limited Company

Advanced Level - Question Paper

(A) State the differences between ordinary shares and debentures in terms of:

(1) nature of capital; and

(2) financial burden on the limited company. (2 marks) (B) Below is the trial balance of Alpha Limited as at 31 March 2021:

Dr Cr

$ $

Office equipment 2,500,000

Accumulated depreciation – office equipment, 1 April 2020 1,080,000

Inventory, 1 April 2020 190,000

Allowance for doubtful accounts, 1 April 2020 50,000

Purchases and Sales 500,000 2,150,000

Administrative, selling and distribution expenses 415,800

Ordinary share dividends 200,000

Debenture interest 18,000

4% Debentures 900,000

Ordinary share capital 3,500,000

Cash at bank 5,011,200

General reserve 80,000

Retained profits, 1 April 2020 120,000

Trade receivables and Trade payables 250,000 35,000

Share applications 1,170,000

9,085,000 9,085,000

Additional information:

(i) On 1 March 2021, the company issued 30,000 ordinary shares at $26 each. Applications had been received for 45,000 ordinary shares and it was decided to allot the shares on the basis of two shares for every three shares subscribed. The shares had been allotted on 31 March 2021, but no entries were made for this. The excess application monies would be refunded on 7 April 2021.

(ii) The following administrative expenses were to be paid in April 2021:

- Directors’ fees of $120,000 - Audit fees of $30,000

(iii) Estimated profits tax amounted to $85,000 had not yet been recorded in the books.

(iv) It is the company’s policy to depreciate its non-current assets on a reducing balance basis at a rate of 15% per annum and to classify the depreciation expenses as administrative expenses.

(v) The 4% debentures were issued on 1 July 2020 with maturity date on 30 June 2023 and the debenture interest is payable at the end of each quarter.

(27)

Advanced level: Page 2 (vi) On 28 March 2021, there was a fire in the warehouse and inventory costing $30,000 was destroyed. The insurance company agreed to compensate the business for 60% of the inventory destroyed. No entries were made in the books. After the physical inventory count on 31 March 2021, the inventory was valued at $100,000. Part of the closing inventory costing $15,000 was slightly damaged and could only be sold for $3,450 after paying repair fee of $500. Closing inventory had not been adjusted for this.

(vii) On 29 March 2021, one of the customers who had owed the company $40,000 had declared bankruptcy. The company decided to write off the debt but no entries were made in the books. An allowance for doubtful accounts of 5% on trade receivables was to be provided on 31 March 2021.

(viii) On 31 March 2021, the board of directors resolved to transfer $50,000 to general reserve.

(ix) During the year, ordinary share dividends of $200,000 was declared and paid. Final dividend of $2 per share was to be declared in May 2021.

REQUIRED:

Prepare for Alpha Limited,

(a) an income statement for the year ended 31 March 2021, showing separately destroyed inventory value, profit before tax and profit after tax. (6 marks) (b) a statement to calculate the retained profits as at 31 March 2021. (2 marks)

(c) a statement of financial position as at 31 March 2021. (8 marks)

(Total: 18 marks) Challenging questions

After preparation of the financial statements for the year ended 31 March 2021, the following omissions in the books were revealed.

(i) During the year, $300 was received from a customer whose debt had been written off as bad before.

(ii) On 31 March 2021, the company received goods of $3,500 as free sample from a supplier.

REQUIRED:

Prepare a statement to calculate the revised retained profits as at 31 March 2021. (2 marks)

(28)

Advanced level: Page 3 Graded Assignment: Accounting for Limited Company

Advanced Level – Student Worksheet

(A)

(B)(a)

(29)

Advanced level: Page 4 (b)

(30)

Advanced level: Page 5 (c)

(31)

Advanced level: Page 6 Challenging questions

(32)

Advanced level: Page 7 Graded Assignment: Accounting for Limited Company

Advanced Level – Suggested Solution and Explanatory Notes (A) Differences between ordinary shares and debentures:

1. Ordinary shares are share capital and are reported under the equity part in the statement of financial position. Debentures are loan capital and are reported as liabilities in the statement of financial position.

2. The limited company pays ordinary shareholders dividend at a variable rate but pays debenture holders interest at a fixed rate.

Remarks: There are other differences between ordinary shares and debentures Ordinary shares Debentures

Voting rights granted to holders 

×

Holders’ priority to claim on net

assets upon liquidation 2nd 1st

(B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales 2,150,000

Less: Cost of goods sold

Opening inventory 190,000

Add: Purchases 500,000

Less: Destroyed Inventory 30,000

Less: Closing inventory

[$100,000 – ($15,000 – $2,950)] 87,950 572,050

Gross profit 1,577,950

Less: Expenses

Administrative, selling and distribution expenses (W3) 779,300

Inventory loss (W1) 12,000

Debenture interest (W4) 27,000 818,300

Profit before tax 759,650

Less: Profits tax 85,000

Profit after tax 674,650

(W1) Inventory loss in income statement:

$30,000 × 40% = $12,000

(Only the amount not covered by insurance should be included as expenses.) Inventory damaged in a fire should

be deducted from purchases

Inventory value is valued at the lower of cost and net realisable value (W2)

(33)

Advanced level: Page 8 (W2) Application of the rule of “lower of cost and net realisable value (NRV)”:

If NRV > Cost, inventory is valued at cost. No adjustment is required.

If Cost > NRV, inventory is valued at NRV. Inventory value should be written down.

Cost = $15,000

NRV = Estimated selling price – Estimated necessary costs to complete and make the sale = $(3,450 - 500) = $2,950

As Cost > NRV, inventory should be valued at $2,950

Inventory value would be written down by $(15,000 – 2,950) = $12,050

(W3) Calculation of administrative, selling and distribution expenses for the year ended 31 March 2021

$

As per trial balance 415,800

Add: Directors’ fees (item ii) 120,000

Audit fees (item ii) 30,000

Depreciation expenses (item iv) $(2,500,000 – 1,080,000) × 15% 213,000

Bad debts (item vii) 500

779,300

Allowance for doubtful accounts

$ $

Trade receivables 40,000 Balance b/d 50,000

Balance c/d $(250,000 – 40,000) × 5% 10,500 Bad debts (balancing figure) 500

50,500 50,500

(W4) Calculation of debenture interest for the year ended 31 March 2021 (item v)

As per trial balance – Debenture interest for 6 months 18,000 Add: Accrued interest for 3 months ($900,000 × 4% × 3/12) 9,000 27,000

Alternative calculation: $900,000 × 4% × 9/12 = $27,000

1 Jan 2021 – 31 Mar 2021

1 Jul 2020 – 31 Mar 2021

(34)

Advanced level: Page 9 (b) Formula to calculate the retained profits carried forward:

Retained profits carried forward to next year

= Retained profits brought forward from last year + Net profit after tax - Transfer to reserves (e.g. General reserve) - Share dividends declared during the financial period

Alpha Limited

Statement to calculate the retained profit as at 31 March 2021

$ $

Retained profits, 1 April 2020 120,000

Add: Profit after tax 674,650

794,650 Less: Transfer to general reserve (item viii) 50,000

Ordinary share dividends (item ix) 200,000 250,000

Retained profits, 31 March 2021 544,650

(c)

Alpha Limited

Statement of financial position as at 31 March 2021

$’000 $’000 $’000

ASSETS

Non-current assets

Office equipment, net $(2,500,000 – 1,080,000 – 213,000 (item iv)) 1,207,000 Current assets

Inventory $(100,000 – 12,050 (W2)) 87,950

Trade receivables $(250,000 – 40,000 (item vii)) 210,000 Less: Allowance for doubtful accounts

$(250,000 – 40,000) × 5% 10,500 199,500

Insurance compensation receivables (W1) 18,000

Cash at bank 5,011,200 5,316,650

Total assets 6,523,650

EQUITY AND LIABILITIES Shareholders’ Equity

Ordinary share capital $(3,500,000 + 780,000) 4,280,000

General reserve $(80,000 + 50,000) 130,000

Retained profits (from part b) 544,650

4,954,650 Bad debts written off

Dr Allowance for doubtful accounts $40,000 Cr Trade receivables $40,000

Allotment of 30,000 ordinary shares Dr Share applications $780,000 Cr Ordinary share capital $780,000 (30,000 x $26)

(35)

Advanced level: Page 10 Non-current Liabilities

4% Debentures 900,000

Current liabilities

Trade payables 35,000

Share applications refundable (item i) 390,000

Tax payable (item iii) 85,000

Accrued administrative expenses $(120,000 + 30,000) (item ii) 150,000

Accrued debenture interest (item v) (W4) 9,000 669,000

Total equity and liabilities 6,523,650

Oversubscribed amount to be refunded Dr Share applications $390,000

Cr Share applications refundable $390,000 [(45000 - 30,000) x $26]

(36)

Advanced level: Page 11 Challenging questions

Alpha Limited

Statement to calculate the revised retained profits as at 31 March 2021

$

Retained profits before revision 544,650

Add: Reduction in bad debts (W5) 300

Revised retained profits 544,950

(W5)

Allowance for doubtful accounts

$ $

Trade receivables 40,000 Balance b/d 50,000

Balance c/d $(250,000 – 40,000) × 5% 10,500 Trade receivables: Bad debts recovery 300 Bad debts (balancing figure) 200

50,500 50,500

Note: Item (ii) does not affect retained profits.

Double entries required for recording bad debt recovery

Dr Trade receivables $300

Cr Allowance for doubtful accounts $300

Dr Cash / Bank $300

Cr Trade receivables $300

(37)

Advanced level: Page 12 Points to note:

Different scenarios of share subscription

Full subscription Over-subscription

No. of shares subscribed = No. of share issued No. of shares subscribed > No. of share issued Accounting treatment: Step 1 & 2 Accounting treatment: Step 1 - 3

Step 1: Receive monies from applicants Dr Cash at bank

Cr Share applications

(No. of shares subscribed × issue price per share) Step 2: Allot ordinary shares to successful

applicants

Dr Share applications

Cr Ordinary share capital

(No. of shares issued × issue price per share) Step 3: Refund monies to unsuccessful

applicants (over-subscription)

Dr Share applications

Cr Cash at bank / Share applications refundable [(No. of shares subscribed – no. of shares issued) × issue price per share]

Common mistakes:

1. Mixed up the accounting treatments for dividends declared during the financial period and after the financial period.

2. Failed to include the correct amount of loss on destroyed inventory (i.e. the uncompensated amount) in the income statement.

3. Mistakenly treated the reduction in value of slightly damaged inventory as an expense in the income statement.

4. Mistakenly treated free samples received from supplier as purchases.

(38)

Marking Scheme: Page 1 Graded Assignment: Accounting for Limited Company

Marking Scheme (A) Differences between ordinary shares and debentures:

1. Ordinary shares are share capital and are reported under the equity part in the statement of financial position. Debentures are loan capital and are reported as liabilities in the statement of financial position.

2. The limited company pays ordinary shareholders dividend at a variable rate but pays debenture holders interest at a fixed rate.

(1 mark each, total 2 marks) Mark (B)(a)

Alpha Limited

Income statement for the year ended 31 March 2021

$ $

Sales 2,150,000 0.5

Less: Cost of goods sold

Opening inventory 190,000 0.5

Add: Purchases 500,000 0.5

Less: Destroyed inventory 30,000 0.5

Less: Closing inventory

[$100,000 – ($15,000 – $2,950)]

87,950 572,050 0.5

Gross profit 1,577,950

Less: Expenses

Administrative, selling and distribution expenses (W1) 779,300 2

Inventory loss ($30,000 × 40%) 12,000 0.5

Debenture interest 27,000 818,300 0.5

Profit before tax 759,650

Less: Profits tax 85,000 0.5

Profit after tax 674,650

(6) W1: Calculation of administrative, selling and distribution expenses for the year

ended 31 March 2021

$

As per trial balance 415,800

Add: Administrative expenses $(120,000 + 30,000) 150,000 0.5 Depreciation expenses

$(2,500,000 – 1,080,000) × 15%

213,000 1

Bad debts (W2) 500 0.5

779,300

(39)

Marking Scheme: Page 2 W2: Preparation of allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables 40,000 Balance b/d 50,000

Balance c/d $(250,000 – 40,000) × 5% 10,500 Bad debts (balancing figure) 500

50,500 50,500

(b)

Alpha Limited

Statement to calculate the retained profit as at 31 March 2021

$ $

Retained profits, 1 April 2020 120,000 0.5

Add: Profit after tax 674,650 0.5

794,650

Less: Transfer to general reserve 50,000 0.5

Ordinary share dividends 200,000 250,000 0.5

Retained profits, 31 March 2021 544,650

(2) (c)

Alpha Limited

Statement of financial position as at 31 March 2021

$’000 $’000 $’000

ASSETS

Non-current assets

Office equipment, net $(2,500,000 – 1,080,000 – 213,000) 1,207,000 1 Current assets

Inventory $(100,000 – 12,050) 87,950 0.5

Trade receivables $(250,000 – 40,000) 210,000 0.5

Less: Allowance for doubtful accounts 10,500 199,500 0.5

Insurance compensation receivables 18,000 0.5

Cash at bank 5,011,200 5,316,650 0.5

Total assets 6,523,650

EQUITY AND LIABILITIES Shareholders’ Equity

Ordinary share capital $(3,500,000 + 780,000) 4,280,000 0.5

General reserve $(80,000 + 50,000) 130,000 0.5

Retained profits 544,650 0.5

4,954,650 Non-current liabilities

4% Debentures 900,000 0.5

(40)

Marking Scheme: Page 3 Current liabilities

Trade payables 35,000 0.5

Share applications refundable 390,000 0.5

Tax payable 85,000 0.5

Accrued administrative expenses $(120,000 +30,000) 150,000 0.5

Accrued debenture interest 9,000 669,000 0.5

Total equity and liabilities 6,523,650

(8)

(Total: 18 marks) Challenging questions in Advanced Level:

Alpha Limited

Statement to calculate the revised retained profit as at 31 March 2021

$ $

Original retained profits 544,650

Add: Reduction in bad debts (W3) 300 (1)

Revised retained profits 544,950 (1)

(Total: 2 marks) W3: Adjustment of bad debts recovery in allowance for doubtful accounts

Allowance for doubtful accounts

$ $

Trade receivables 40,000 Balance b/d 50,000

Balance c/d $(250,000 – 40,000) × 5% 10,500 Trade receivables: Bad debts recovery 300 Bad debts (balancing figure) 200

50,500 50,500

Figure

Updating...

References

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