ACCOUNTING 9197/3

NOVEMBER 2016

Question 1

(a) Income Statement for the year ended 30 June 2012

$ $

Gross profit (162 000 – 1 500) 160 500 (1)

Add other income
Bad debts recovered 450 (1)
Decrease in provision for doubtful debts 500 (1) 950
Total revenues 161 450

Less expenses
Selling and distribution expenses (46 100 +
2 500 + 1 300) 49 900 (1)
Administration expenses 43 000 + 3 000 –
2 000 – 4 000) 40 000 (1)
Bad debts 32 000 (1)
Depreciation: Motor vehicles 17 000 (1)
Fixtures and fittings 26 000 (1) 164 900
Operating loss 3 450 (1)
Add Investment income
Dividends received 7 800 (1)
Net profit before interest and tax 4 350 (1)
Less Interest on loan stock 700 (1)
Net profit before tax 3 650
Less Corporation tax 800 (1)
Net profit after tax 2 850
Add retained loss brought forward (5 000)
Retained loss carried forward 2 150

[13]
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(b) Statement of financial position as at 30 June 2012.

Cost Acc Depn NBV

ASSETS $ $ $
Non – current assets
Premises 434 000 ____ 434 000 (1)
Motor vehicles 170 000 102 000 68 000 (1)
Fixtures and fittings 130 000 129 000 1 000 (1)
734 000 231 000 503 000
Investments 130 000 (1)
633 000
Current assets
Inventory (20 400 – 1 500) 18 900 (1)
Trade receivables (132 000 – 32 000) 100 000 (1)
Less Allowance for doubtful debts 2 500 (1) 97 500
Prepayment: Administration expenses 2 000 (1)
Accrued dividends receivable 800 (1)
Cash 850 (1) 120 050
Total assets 753 050

Equity and liabilities

Capital and reserves
Ordinary shares of $0,50 each, fully paid 520 000 (1)
Share premium 61 500
Asset replacement reserve 29 000 (1)
General reserve 75 200
Retained loss 2 150 (1)
683 550
Non – current liabilities
7 % convertible loan stock 10 000

Current liabilities
Trade payables 17 300
Accruals (280 + 1 300) 1 580 (1)
Corporation tax 800 (1)
Bank overdraft 39 820 (1) 59 500
Total equity and liabilities 753 050

[16]

Total for the question 29 marks

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Question 2

(a) (i) Total reduction in the value of ordinary shares

$ $
Investments 18 000 (1)
Less Fixtures and fittings 5 000 (1)
Motor vehicles 67 400 (1)
Inventory 7 000 (1)
Trade receivables 18 000 (1)
Equipment 104 000 (1)
Profit and loss 35 000 (1) 236 400
218 400 (2)

OR

Capital Reduction Account

$ $
Fixtures and fittings 5 000 (1) Investment 18000 (1)
Motor vehicles 67 400 (1) Ordinary share capital 218400 (2)
Inventory 7 000 (1)
Trade receivables 18 000 (1)
Equipment 104 000 (1)
Profit and loss 35 000 (1)
236 400 236 400

[9]

(ii) The new value of each share after the capital reconstruction scheme.

$
Par value of ordinary share capital 520 000
Less reduction of share capital 218 400
301 600

$301 600
1 040 000

= $0,29 (2)

Or 29 cents
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(b) Statement of financial position as at 30 June 2015

$ $
Assets
Non – current assets
Premises 160 000
Fixtures and fittings (17 000 - 5 000) 12 000 (1)
Equipment (130 000 – 104 000) 26 000 (1)
Motor vehicles (150 000-67 400) 82 600 (1)
280 600

Current assets
Inventory (30 000 - 7 000) 23 000 (1)
Trade receivables (45 000 – 18 000) 27 000 (1)
Bank (-28 000 + 60 000 – 5 700) 26 300 (2)
Cash 1 200 77 500
Total assets 358 100

Equity and liabilities

Share capital and reserves
Ordinary share capital (301 600 + 29 000) 330 600 (1)
Share premium (40 800 – 29 000) 11 800 (1)

Non – current liabilities

7% Loan stock 10 000

Current – liabilities
Trade payables (11 400 – 5 700) 5 700 (1)
Total equity and liabilities 358 100

[10]

Total for the question 21 marks

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Question 3

(a) Debentures
These are loans provided to a company by debenture holders who are entitled
to a fixed rate of interest regardless of whether profits are made or not. (1)

Advantages
- It is a long term source of finance (1)
- Interest rate does not change with level of profits, therefore in years of
high profits Muller Plc will benefit. (1)
- It is repayable thereby relieving the company of the interest burden (1)
- debenture interest is tax deductible (1)
- Low issue costs (1)

Maximum of 2

Disadvantages
- Interest must be paid whether profits are made or not. (1)
- Usually they are secured against assets. (1)
- Repayment affects cash flows. (1)
- They discourage other potential investors. (1)
- Can force the company into liquidation if interest payments are not met. (1)

Maximum of 2

(b) Convertible loan stock

These are loans which can be converted into ordinary shares at a pre-determined
price on a set future date. (1)

Advantages
- Usually it carries a lower rate of interest because of the option to convert. (1)
- Interest rate is fixed and does not change with the level of profits, therefore
Muller Plc will benefit in years of high profits. (1)
- Upon conversion, the company is relieved of the interest burden. (1)

Maximum of 2

Disadvantages
- Interest must be paid whether profits are made or not. (1)
- Can force the company into liquidation if interest obligation is not met. (1)

Maximum of 2
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(c) Hire purchase

It is a credit facility whereby the purchaser buys an asset by paying in instalments.
(1)

Advantages
- Asset is available for use before full payment. (1)
- Payment by instalments increases Muller Plc’s liquidity. (1)
- Can afford to buy expensive assets.(1)

Maximum of 2

Disadvantages
- It is a very expensive facility due to finance charges. (1)
- The seller may take back the asset if buyer defaults payments. (1)
- Asset does not belong to the buyer until the final payment.(1)

Maximum of 2

(d) Operating lease

This is a facility whereby the lessor (owner of asset) avails an asset to the
lessee (the one in need of the asset) for a charge but the lessee will never own the asset. (1)

Advantages
- Muller Plc will have the asset only when it is needed. (1)
- Lessor remains with the responsibility to maintain the asset and other risks. (1)
- Less risk of the asset becoming redundant or obsolete. (1)

Maximum of 2

Disadvantages
- Lessee does not own the asset (ownership of the asset remains with
lessor). (1)
- Lessee cannot dispose the asset. (1)
- Lessor may give regulations. (1)

Maximum of 2

(e) Debt factoring

This is when a company sells its receivables to a factoring company. (1)
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Advantages
- Improves cash flow. (1)
- Early recovering of cash owing from trade receivables. (1)
- Credit control and management expenses are transferred to factoring
company. More time is availed to management for other duties other than
collecting trade receivables. (1)
- Risk of bad debts is transferred to factoring company. (1)

Maximum of 2

Disadvantages
- Trade receivables are sold below their book value. (1)
- Muller Plc’s relationship with customers may be frustrated by the factor’s
conduct. (1)

Maximum of 2

Total for the question 25 marks

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Question 4

(a) (i) Process 1 Account

Units $ Units $
Direct materials 10 000 45 000 (1) Scrap sales 2 000 600 (1)
Direct labour 10 000 (1) Transfer to process 2 8 000 74 400 (1)
Overheads 20 000 (1)
10 000 75 000 10 000 75 000

[5]

(ii) Process 2 Account

Units $ Units $
Transfer from process 1 8 000 74 400 (1) W.I.P. (W4) 1 000 15 797,50 (2)
Direct materials (W1) 24 960 (3) Finished goods 7 000 126 875(2)
Direct labour 17 325 (3) (W5)
Overheads (W5) 25 987,50(3)
8 000 142 672,50 8 000 142 672,50

[ 14]

Workings

(i) Direct materials (7 000 x 0,8 kg x $4) (1) + (1 000 x 0,8 kg x $4 x 0,8) (2)

= $24 960

(ii) Direct labour (7 000 x 0,75 hrs x $3) (1) + (1 000 x 0,75hrs x 3 x 0,7) (2)

= $17 325
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(iii) Overheads (7 000 x 0,75hrs x $3 x 1,5) (1) + (1 000 x 0,75hrs x 3 x 1,5 x0,7) (2)

= $25 187, 50

(iv) Work in progress 1 000 x 74 400 (1) + (2 560 + 1 575 + 2 362,50) (1)
8 000

= $15 797, 50

(v) Finished goods (74 400 – 9 300) (1) + (22 400 + 15 750 + 23 625) (2)

= $126 875

(b) (i) Cost of one completed unit

$126 875
7 000

= $18, 13 (1)

(ii) Cost of one unit of work in progress

$15 797, 50 (1)

(c) Normal loss Abnormal loss

- expected losses - unexpected losses

- uncontrollable losses (1) - can be controlled by efficient use of

resources (1)

- valued at scrap value (1) - valued at cost per unit of good production (1)

- scrap value reduce total production - scrap value does not affect production cost (1)
cost (1)

- cost is absorbed by good - cost is expensed in the income statement (1)

production

Maximum 2 maximum 2

Total for the question 25 marks