This resource material provides teachers with examples of graded assignments for
reference and is by no means exhaustive. Teachers are advised to adapt the materials
according to the diverse learning needs of students if deemed necessary.
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.
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)
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
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)
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)
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
$(__________ – __________) ×____%
1 Jan 2021 – 31 Mar 2021 1 Jul 2020 – 31 Dec 2020
Write off the uncollectible amount
Reported as Liabilities in the statement of financial position
NBV = Cost – Accumulated depreciation
Elementary level: Page 7 Insurance compensation receivables ($__________ ×___%) (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
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”
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
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
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
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.
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.
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)
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
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.
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)
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.
$ $ $
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
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
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”
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
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
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.
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.
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)
Advanced level: Page 3 Graded Assignment: Accounting for Limited Company
Advanced Level – Student Worksheet
(A)
(B)(a)
Advanced level: Page 4 (b)
Advanced level: Page 5 (c)
Advanced level: Page 6 Challenging questions
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)
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
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)
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]
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
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.
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
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
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