Paper 2 Exercise 2

SECTION A (39 marks)

Answer ALL questions in this section.
1. Tsz Yan Company is a local bookstore. The company’s financial performance was poor during the past
few years. The owner was considering if the company should be liquidated.

REQUIRED:
(a) The company paid the rent after the year end so as to increase the profit for this year. Explain
whether the company should do so with an appropriate accounting concept or principle. (3 marks)
(b) Explain the going concern assumption. If it is decided to liquidate the company within 1 year,
how should its non-current assets be valued at the year end this year? (2 marks)

2. Peter’s firm manufactures and sells electronic appliances. The following account balances were
extracted from the accounting records of Peter’s firm as at 31 December 2020:
$
Sales 865,500
Inventory, 31 December 2019 40,000
Inventory, 31 December 2020 ?
Gross profit for the year 640,200
Net profit for the year 352,600
Capital, 1 January 2019 584,000
Office furniture 546,000
Cash at bank 140,000
30-month term deposit 6,000
Trade payables 420,000
Rental deposit from tenants 624,600

In 2019, the return on capital employed, current ratio and liquid ratio of Peter’s firm were 35%, 1:1 and 0.8:1
respectively. In 2020, additional capital was not introduced and there were no drawings.

REQUIRED:
(a) Prepare a statement of financial position for Peter’s firm as at 31 December 2020. (3 marks)

(b) Based on the return on capital employed, briefly comment on the profitability of Peter’s firm in
2020. (2 marks)
(c) Calculate the following ratios for 2020 for Peter’s firm (to two decimal places):

(1) Current ratio (1 mark)

(2) Liquid ratio (1 mark)

(c) Comment on the liquidity of Peter’s firm in 2020. (3 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 1

3. The bank statement of Cheuk Lam Company as at 31 May 2020 showed a credit balance of $53,484. The
following was then discovered:

(i) The following cheques are entered in the cash book but not presented by 31 May 2020:
Date drawn Cheque No. Payee Amount ($)
1 October 2019 34085 Fast Company 5,200
12 May 2020 34162 Move Company 7,800
4 July 2020 35002 Beauty Company 2,100

(ii) Cheuk Lam withdrew a business cheque #35010 of $420 for his personal credit card payment of
entertainment expense. No entries had been made in books.
(iii) Interest of $670 was credited by the bank but was recorded in the wrong side of the cash book.
(iv) A debit advice of $250 from bank for stopping the standing order of trade subscriptions had been
received but no entries had been made.
(v) Cheques #52085 of $5,500 from customers had been banked on 31 May 2020 but cleared by the
bank on the following day.
(vi) A deposit made in May 2019 was entered in the bank statement as $4,650 but the cash book
showed the correct figure of $4,560.

REQUIRED:
(a) Update the cash book as at 31 May 2020. (3 marks)
(b) Prepare a bank reconciliation statement as at 31 May 2020, commencing with the bank statement
balance. (2 marks)
(c) Explain the meaning of stale cheque. (1 mark)
(d) Indicate the cheque number of the posted-dated cheque from the above information. (1 mark)
(Total: 7 marks)

4. The financial year of Anthony Company ends on 31 May. The company’s ledger accounts showed the
net book value of its machinery as at 1 June 2019 was $420,000.

All machines were purchased on 1 June 2017. The company depreciates its machinery over 8 years on a
monthly basis. On 1 September 2019, a machine costing $4,800 was traded-in for a new one at a loss of
$2,000. The new machine costs $9,600, its remaining balance would be paid by cash.

REQUIRED:
(a) Prepare the following accounts for the year ended 31 May 2020:
(1) Machinery (2 marks)
(2) Disposal: Machinery (2 marks)
(b) Calculate the depreciation expense for machinery for the year ended 31 May 2020. (2 marks)

On 30 November 2020, the company bought a motor vehicle at a list price of $50,000 with an allowance
of 5% trade discount. The following costs were also paid by cheque on the same day:
$
Carriage cost 4,000
Annual license fees 10,000
Installation cost 2,300
Repair cost for accidental damage during installation 1,600
Testing fee 1,200

REQUIRED:
(c) Prepare the journal entry to record the payments on 30 November 2020. Narration is not required.
(2 marks)
(Total: 8 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 2

5. Given the following information about Suet Yi Limited for the year ended 31 December 2020:
$
Profit after tax 1,240,000
Ordinary share capital, at $2 each 800,000
3% Preference share capital (250,000 shares) 500,000
Current price per ordinary share 16.5
Bank loan 40,000
Interim preference dividend 10,000
Retained profit, 31 December 2019 210,000
General reserve, 31 December 2019 12,000

Additional information:
(i) The board of directors resolved to transfer $1,000 to the general reserve on 1 October 2020.
(ii) A final ordinary dividend of $0.1 per share was proposed on 1 October 2020.
(iii) There was no change in share capital during the year ended 31 December 2020.
(iv) The bank loan was taken in 2019. The loan was to be repaid in 5 equal annual instalments. The first
payment was to be made on 31 December 2021.

REQUIRED:
(a) Prepare a statement to show the value of retained earnings as at 31 December 2020. (3 marks)
(b) Calculate (to 2 decimal places) the following ratios:
(1) Earnings per share (2 marks)
(2) Price-earnings ratio (2 marks)
(3) Gearing ratio (2 marks)
(Total: 9 marks)
SECTION B (24 marks)
6. Tommy started business on 1 January 2020. His company produces and sells a single product. The
following information was extracted for the year 2020:
Direct materials $20 per kg
Direct labour $30 per hour
Variable production overhead $3 per unit
Production units 700 units
Sales 400 units

Additional information for the year 2020:

(i) The unit selling price was $300.
(ii) Each unit of product requires 2 kg of direct materials.
(iii) 3 hours of direct labour are required for producing each unit of product.
(iv) Budgeted annual fixed production overhead costs were $7,500.
(v) The absorption of fixed production overhead was based on a normal annual production level of
500 units. The over-absorption of fixed production overhead for the year 2020 was $4,000.
(vi) Monthly fixed administrative expense was $1,000.
(vii) Selling expense consists of variable marketing expense and fixed distribution expense. The total
cost will be $28,000 if 2,000 units are produced, and $68,000 if 12,000 units are produced.

REQUIRED:
(a) Explain direct cost. (1 mark)
(b) Explain the situation that over-/under-absorption of overheads will occur. (1 mark)
(c) Calculate the predetermined production overhead absorption rate. (1 mark)
(d) Prepare an income statement for the year ended 31 December 2020 using marginal costing.
(7 marks)
(e) Explain two advantages of using marginal costing. (2 marks)
(Total: 12 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 3

7. Wing, Lo and Tim were in partnership sharing profits and losses in the ratio of 2: 3: 2. The following
balances were extracted from the books as at 31 December 2019:

Dr. ($) Cr. ($)

Net profit 434,000
Drawings – Wing 23,000
Capital, as at 1 January 2019 – Wing 356,000
– Lo 480,000
– Tim 280,000
Current, as at 1 January 2019 – Wing 22,000
– Lo 30,000
– Tim 14,000

Goodwill 35,000
Office furniture, net 280,000
Inventory 530,000
Trade receivables and trade payable 300,000 120,000
Cash at bank 464,000

Additional information for the year ended 31 December 2019:

(i) No entries had been made for the cash discounts for customers at $2,800.
(ii) Rates expense recorded includes $14,000 for Lo’s personal residence on 1 July 2019.
(iii) Lo was entitled to a monthly salary of $7,000.
(iv) Interest of 7% per annum was to be charged on the balance of the partners’ drawings accounts.

REQUIRED:
(a) Prepare an income statement extract (showing appropriations only) for the year ended 31
December 2019. (3 marks)

On 1 January 2020, Wing retired from the business with the following arrangement:
(i) Lo and Tim were to share profits and losses equally.
(ii) Goodwill was to be revalued. After revaluation, Lo will share goodwill of $14,000. The company
decided not to maintain the goodwill account.
(iii) 25% of the office furniture would be taken over by Wing. The value of the remaining office
furniture would be decreased by 40%.
(iv) 1,000 units of inventory recorded at cost of $250 each were damaged. Each damaged good could
only be sold at $130 after spending $20 on repairs.
(v) Trade payables were to be revalued to $85,000.
(vi) The balance owing to Wing would be left as a long-term loan to the new partnership.
(vii) The fixed capital of the partnership was $800,000, to be divided among the partners in their profit
and loss sharing ratio. Any surplus or deficit will be transferred to or from their current accounts.

REQUIRED:
(b) Prepare the revaluation account. (2.5 marks)
(c) Prepare the capital accounts in columnar form, showing all the adjustments regarding the
retirement of Wing. (4.5 marks)
(d) Explain two reasons why revaluation is necessary upon the retirement of partner. (2 marks)
(Total: 12 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 4

8. Yuen Ying Company manufactures two products: X and Y. Information of the products are as follows:

Product X Product Y
Unit selling price $60 $40
Royalty per unit $4 $2
Variable production overhead per unit $2 $5
Variable selling expense per unit $3 $4
Units produced per direct labour hour 4 5
Market demand (units) 5,000 6,000

Additional information:
(i) Fixed production overheads are $5,000 per quarter while fixed administrative expense are $4,000
per month.
(ii) Each direct labour hour costs $60.

REQUIRED:
(a) Name all the components of prime cost for the production of Product X. (1 mark)
(b) Calculate the breakeven sales units for Product X and Product Y respectively if the two products
are to be sold at ratio of 4 Product X to 1 Product Y. (2 marks)
(c) Calculate the profit that Yuen Ying can maximize per year. Assume there is no specific sales
proportion for Products X and Y, but there are only 1,700 direct labour hours available per year.
(4 marks)

The company uses a machine which was purchased at $5,000 2 years ago. The accumulated
depreciation of this machine is $1,000. The company is considering replacing this machine with an
upgraded model which costs $6,000. The estimated useful life of the new machine is 8 years. The
annual operating cost of the current and the new machine are $450 and $300 respectively. By replacing
the existing machine, direct materials used in production can be reduced by $140 per year, while the
annual depreciation can be reduced from $600 to $500.

If the current machine is sold now, it would have a salvage value of $4,300. If operated for the
remaining useful life of 8 years, the current machine would have no salvage value.

If the current machine is retained, a repair cost of $480 per annum would be incurred.

REQUIRED:
(d) Prepare a statement to calculate the incremental profit of replace the existing machine. (3 marks)
(e) Explain sunk cost and give an example of sunk cost from the above case. (2 marks)
(Total: 12 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 5

SECTION C (20 marks)
Answer ONE question in this section.

9. The following balances were extracted from the financial statements of Kin Long Limited as at 31
December 2020:
$
Retained profits 530,400
Inventory 240,000
Prepaid expense 3,200

Upon investigation, the following was discovered:

(i) Accrued rent at $13,800 for the owner’s private residence was mistakenly recorded as a
prepayment.
(ii) No entries were made for the decrease in allowance for doubtful debts of $840.
(iii) A dishonoured cheque of $ 690 received was correctly entered in the cash book, but was credited
to the trade receivables account twice.
(iv) Bad debts recovered amounting to $3,000 was wrongly posted to the trial balance as bad debts
$4,000.
(v) The company entered into a 2-year tenancy agreement to rent an office. The lease period
commenced on 1 April 2020. The following payments were recorded as rental expense for 2020.
(1) A rental deposit of $20,000 was paid on 1 April 2020.
(2) Ten months’ rental of $240,000 was paid in 2020. A two-month rent free period was
allowed and rental payments commenced on 1 June 2020.
(vi) A contra entry of $2,300 in the trade receivables and trade payable accounts had been incorrectly
recorded as $3,200.
(vii) Inventory as at 31 December 2020 was ascertained by stocktaking conducted on 25 December
2020. Other information was as follow:
(1) All sales were marked up at 20%.
(2) A debit note of $5,200 issued by Kin Long Company on 28 December 2020.
(3) Product samples priced at $2,400 were sent to new customers as a free trial on 27
December 2020.
(4) Credit purchases of $5,000, less a 10% trade discount, was made on 16 December 2020.
The products were received on 26 December 2020.
(5) Goods received on 26 December 2020 with a list price of $1,200 was returned on 29
December 2020.
(6) 5,000 units of goods with selling price of $12 each were stolen on 30 December 2020.
(7) Goods originally priced at 3,600 was in excess demand recently, and could now be sold at a
mark-up of 80%.

REQUIRED:
(a) Explain the accounting principle or concept violated in item (i). (3 marks)
(b) Prepare the necessary journal entries to correct items (i) to (vi) above. Narrations are not
required. (7 marks)
(c) Prepare a statement to calculate the inventory value as at 31 December 2020. (3 marks)
(d) Explain the accounting treatment of item (vii)(7) with an appropriate accounting principle or
concept. (4 marks)
(e) Suppose the company’s average trade receivables collection period increased from 30 days to 70
days over two years. Explain if this is a good sign or bad sign, and what the company’s
management can do in response to this change. (3 marks)
(Total: 20 marks)

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 6

10. Sum Ying started her business as a sole trader of a boutique on 1 January 2019.

(i) The assets and liabilities of the business are as follows:

2019 ($) 2020 ($)

Equipment, net 240,000 ?
Inventory 248,000 ?
Trade receivables 160,000 740,000
Cash at bank 86,800 ?
Trade payables 18,000 16,500
Bank loan 12,300 5,600
Prepaid rent 4,800 16,000
Accrued electricity - 580

(ii) During 2020, receipts from customers $25,500 were banked, after payments of sundry expense
$3,000 and Sum Ying’s drawings $1,500.
(iii) The bank statements of 2020 showed that the total payments made to trade suppliers amounted to
$5,200. A cheque of $3,200 issued in December 2020 for purchase of goods in 2020 was not
presented until 5 January 2021.
(iv) Cash discounts allowed and received were $4,200 and $4,900 respectively.
(v) All sales and purchases were on credit basis. Sales were made at a margin of 70% in 2020, except
for some outdated goods, costing $10,000, which were sold at cost.
(vi) A 4% fixed deposit was made by transferring $10,000 from the cash at bank account on 1 July
2020. The fixed deposit will mature on 1 July 2025.
(vii) Part of the bank loan was paid by cheque. The remaining loan was to be repayable in October
2021. Loan interest of $450 has not been paid in 2020.
(viii) The firm paid rent for $50,000 and electricity for $6,200 by cheque in 2020.
(ix) A piece of equipment with net book value of $50,000 was sold for $3,500 by cheque. No record
had been made.
(x) Payments to staff salaries amounted to $23,000, including $4,000 paid by Sum Ying’s personal
cash. Besides, managers were entitled to a bonus of 10% of the net profit before deducting the
bonus.
(xi) A full year’s depreciation was to be provided on all non-current assets at 20% per annum on cost.
No depreciation is to be provided in the year of disposal.

REQUIRED:
(a) Prepare a statement to show the value of sales for the year ended 31 December 2020. (3 marks)
(b) Prepare the cash at bank account. (4 marks)
(c) Prepare an income statement for the year ended 31 December 2020. (8 marks)
(d) Prepare a statement of financial position as at December 2020, showing the change in capital
during the year. (5 marks)
(Total: 20 marks)

END OF PAPER

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 7

 Paper 2A (Suggested answers)

1(a)
It violates accrual concept. 1
- Revenue and expenses should be recognized and recorded when earned or incurred, not when money is
received or paid. 1
- The rent is incurred this year, even though it is to be paid next year, it would still be recorded as an
expense this year. 1
- No marks for “The rent is incurred this year, it should be paid this year”

1(b)
- The going concern assumes that an entity will continue its operation in the forseeable future, it has
neither the intention nor the need to liquidate or reduce its scale of operations significantly. 1
- The non-current assets should be valued at their liquidation/market/net realizable value. 1

2(a)
Peter’s firm
Statement of financial position as at 31 December 2020
$ $ $ 0.5
Non-current assets
Office furniture 546,000
30-month term deposit 6,000 0.5
552,000
Current assets
Inventory (bal.fig.) 1,289,200 0.5
Cash at bank 140,000
1,429,200 0.5
Less: Current liabilities
Trade payable 420,000
Rental deposit from tenants 624,600 (1,044,600) 0.5
Net current assets 384,600
936,600

Financed by:
Capital
Balance as at 1 January 2020 584,000
Net profit 352,600
936,600 0.5

Rental deposit Dr. Rental deposit (Assets)

Cr. Bank
Rental deposit from tenants Dr. Bank
Cr. Rental deposit from tenants (Liabilities)

2(b)
Return on capital employed in 2020
= 352,600 / [(584,000+936,600)/2] x 100%
=46.38% 1
As compared with 2019, Peter’s firm was relatively more efficient in using its owners’ capital to generate
profits in 2020. 1
2(c)(i) (1,289,200+140,000) / (420,000+624,600) = 1.37:1 1
(ii) 140,000 / (420,000+624,600) = 0.13:1 1
2(d)
The company’s liquidity in 2020 was worse than that in 2019. 1
- Compared with 2020, the company has a higher current ratio, meaning the company has higher ability in
repaying short-term debts.

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 8

 - Compared with 2020, the company has a much lower liquid ratio, meaning the company has lower
ability in repaying immediate debts.
- There is a larger difference between the current ratio and liquid ratio in 2020, meaning the company
may have the problem of holding excessive inventory.
3(a)
Cash book (Bank)
$ $
2020 2020
0.5 May 31 Balance b/d 43,124 May 1 Drawings (ii) 420 0.5
0.5 Fast Company (i) 5,200 Bank charges (iv) 250 0.5
0.5 Beauty Company (i) 2,100 Balance c/f 51,094
0.5 Interest revenue (iii) 1,340
($670 x 2)
51,764 51,764
3(b)
Cheuk Lam Company
Bank reconciliation statement as at 31 May 2020
$ $
Balance as per bank statement 53,484
Add: Uncredited deposit #52085 (v) 5,500 0.5
58,984

Less: Unpresented cheque - #34162 (i) 7,800 0.5

Deposit overstated (vi) (4,650-4,560) 90 (7,890) 0.5
Balance as per adjusted cash at bank account 51,094 0.5

3(c) A cheque being unpresented for more than 6 months. 1

3(d) #35002 1

4(a)
Machinery
$ $
2019 2019
0.5 Jun 1 Balance b/d (420,000/(6/8)) 560,000 Sep 1 Disposal: Machinery 4,800 0.5
0.5 Sep 1 Disposal: Machinery 1,450 2020
0.5 Cash (9,600-1,450) 8,150 May 31 Balance c/f 564,800
569,600 569,600

Disposal: Machinery
$ $
2020 2020
0.5 Sep 1 Machinery 4,800 Sep 1 Accumulated depreciation: 1,350 0.5
Machinery (W1)
Machinery (bal. fig.) 1,450 0.5
Loss on disposal 2,000 0.5
4,800 4,800
(W1) 4,800/8 x (2+3/12)
4(b) 4,800/8 x (3/12) + (560,000-4,800)/8 + 9,600/8(9/12)
= $70,450 2

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 9

4(c)
The Journal
Dr ($) Cr ($)
2019
Nov 30 Motor vehicles (50,000x95% + 4,000 + 2,300 + 1,200) 55,000 1
License fee 10,000 0.5
Repair cost 1,600 0.5
Bank 66,600

5(a)
Suet Yi Limited
Statement to show the value of retained earnings as at 31 December 2020
$ $
Profit after tax 1,240,000
Retained profit brought forward 210,000 0.5
1,450,000
Less Appropriations
Transfer to general reserve 1,000 0.5
Preference dividends: Interim 10,000 0.5
Proposed ($500,000 x 3% - $1,000) 5,000 0.5
Ordinary dividends: Proposed ($800,000/$2 x $0.1) 40,000 (56,000) 0.5
Retained profits as at 31 December 2020 1,394,000 0.5

5(b)(1)
1,240,000 − 15,000
800,000 ÷ 2
= $3.06 per share 2

5(b)(2)
$16.5
$3.06
= 5.39 times 2

5(b)(3)
4
40,000( )+500,000
5
4 x 100%
40,000( )+500,000+800,000+1,394,000+(12,000+1,000)+(5,000+40,000)
5
𝑙𝑜𝑎𝑛 𝑝𝑟𝑒𝑓 𝑜𝑟𝑑 𝑅𝐸 𝐺𝑅 𝑃𝐷
= 19.11% 2

6(a) Direct costs are the costs that can be traced to a particular cost object. 1
6(b)
Over-/under-absorption of overheads occur when:
- the actual overheads are different from the absorbed overhead
- the actual production units are different from the budgeted production units
(Any 1 situation, 1 mark each)
6(c)
$3 + $7,500/500 = $18 per unit 1

6(d)
Tommy Company
Income Statement for the year ended 31 December 2020
$ $ $
Sales (400 x $300) 120,000 0.5
Less Cost of goods sold:
Direct materials (20(2) x 400) 16,000 0.5

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 10

 Direct labour (30(3) x 400) 36,000 0.5
Variable production overheads ($3 x 400) 1,200 0.5
Variable marketing expense (W1) ($4 x 400) 1,600 (54,800) 0.5
Contribution margin 65,200
Less Fixed production overhead ($7,500/500x700 – $4,000) 6,500 1
Fixed administrative expense ($1,000 x 12) 12,000 0.5
Fixed distribution expense (W2) 20,000 (38,500) 0.5
Net profit 26,700

(W1)
68,000−28,000
12,000−2,000
= $4

(W2)
$28,000 - $4(2,000) = $20,000

6(e)
- Inventory valuations will not be distorted by the changes in current year’s fixed costs
- It enables the company to concentrate on its controllable aspects by separating its fixed and variable costs
- It helps management to make production and sales decisions with the calculated marginal costs
information
- It facilitates decision-making as fixed costs are sunk costs, which are irrelevant, are not included in cost
of goods sold.
- It facilitates prediction on the changes in profits when there are changes in selling price, sales volume or
variable costs
(Any 2 advantages, 1 mark each)

7(a)
Wing, Lo and Tim
Income statement for the year ended 31 December 2020 (Extract)
$ $ $
Net profit (434,000-2,800(i)+14,000(ii)) 445,200 0.5
Add: Interest on drawings – Wing (23,000 x 7%) 1,610 0.5
- Lo (14,000 x 7% x 6/12) 490 2,100 0.5
447,300
Less: Salary – Lo (7,000 x 12) (84,000) 0.5
363,300 0.5
Share of profit:
- Wing (2/7) 103,800
- Lo (3/7) 155,700
- Tim (2/7) 103,800 0.5
363,300

7(b)
Revaluation
$ $
2020 2020
0.5 Jan 1 Goodwill(35,000-14,000(2)) 7,000 Jan 1 Trade payable (v) 35,000 0.5
0.5 Office furniture (iii) 84,000 (120,000-85,000)
(280,000(75%)(40%)) Capital – Wing (3/7) 56,000
0.5 Inventory (iv) 140,000 - Lo (2/7) 84,000 0.5
(1,000(250-(130-20)) - Tim (3/7) 56,000

231,000 231,000

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 11

 7(c)
Capital
Wing Lo Tim Wing Lo Tim
$ $ $ $ $ $
2020 2020
0.5 Jan 1 Office furniture 70,000 - - Jan 1 Balance b/d 356,000 480,000 280,000
0.5 Revaluation 56,000 84,000 56,000 Current 18,000 190,000 1
0.5 Goodwill - 14,000 14,000 Current (W1) 57,190
0.5 Loan from Wing 287,190 - -
0.5 Balance c/d - 400,000 400,000
413,190 498,000 470,000 413,190 498,000 540,000

(W1)
Current
Wing Lo Tim Wing Lo Tim
$ $ $ $ $ $
2019 2019
Jan 1 Balance b/f 22,000 30,000 - Jan 1 Balance b/f - - 14,000
Dec 31 Drawings 23,000 1,400 - Dec 31 Appropriation
Appropriation - Share of profit 103,800 155,700 103,800
- Interest on 1,610 490 - - Salary - 84,000 -
drawings Balance c/f 72,200
Capital 57,190
Capital 18,000 190,000
Balance c/f - 221,700
103,800 239,700 190,000 103,800 239,700 190,000
7(d) (13DSEQ4d)
- A partner is entitled to get a fair share of the net assets of the company upon his/her retirement.
- Fair values of the assets would be reflected through the asset revaluation process
- Holding gains or losses would be recognized through the asset revaluation process
- The respective share of the gains and losses would be credited and debited to the capital account of the
retiring partner and therefore the amount due to/from the partner can be ascertained
(Any 2 relevant reason, 1 mark each)
8(a) Royalty, direct labour 1

8(b)
Method 1
Contribution per sales mix = (60-4-2-3-60/4)4 + (40-2-5-4-60/5)1 = 144+17 = $161 1
Breakeven of Product X = [5,000(4) + 4,000(12)] / 161 x 4 = 1,690 units 0.5
Breakeven of Product Y = [5,000(4) + 4,000(12)] / 161 x 1 = 423 units 0.5

Method 2
Weighted-average unit contribution margin
= (60-4-2-3-60/4)(4/5) + (40-2-5-4-60/5)(1/5) =28.8+3.4 = $32.2 1
Breakeven of Product X = [5,000(4) + 4,000(12)] / 32.2 x (4/5) = 1,690 units 0.5
Breakeven of Product Y = [5,000(4) + 4,000(12)] / 32.2 x (1/5) = 423 units 0.5

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 12

8(c)
Product X Product Y Total
Unit contribution margin $36 $17
Direct labour hours per unit 0.25 0.2
Contribution per direct labour hour $144 $85 1
Rank 1 2
Production units 5,000 2,250 1
Direct labour hours required 1,250 450
Contribution margin 180,000 38,250 218,250 1
Less: Fixed cost [5,000(4) + 4,000(12)] (68,000) 0.5
Net profit 150,250 0.5

8(d)
Yuen Ying Company
Statement to calculate the incremental profit of replace the existing machine
$ $
Increment revenue
Reduction in operating cost ($300 x 8 – $450 x 8) 1,200 0.5
Reduction in direct materials (140 x 8) 1,120 0.5
Salvage value of the existing machine 4,300 0.5
Reduction of repair cost ($480 x 8) 3,840 0.5
10,460
Less: Incremental costs
Purchase cost (6,000) 0.5
Incremental profit 4,460 0.5

8(e)
Sunk cost is the cost that has been incurred and cannot be recovered. 1
Example: Depreciation/Accumulated depreciation, purchase cost of the current machine 1

9(a)
Business entity is violated 1
- A business is treated as an entity separated from other entities, including its owners.
- The rent for owner’s private residence is a private transaction.
- No entries should be recorded in business accounts.
(Any 2 explanation, 1 mark each)

9(b)
The Journal
Dr ($) Cr ($)
2020
Dec 31(i) Retained profits 13,800
Prepaid expense 13,800 1
(ii) Allowance for doubtful debts 840
Retained profits 840 1
(iii) Trade receivables (690 x 3) 2,070
Suspense 2,070 1
(iv) Suspense 7,000
No entry - 1
(v) Rental deposit 20,000
Retained profits 20,000 1
Prepaid expense (240,000/10 x 3) 72,000
Retained profits 72,000 1
(vi) Trade receivables (3,200-2,300) 900
Trade payables 900 1

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 13

9(c)
Kin Long Limited
Statement to calculate the inventory value as at 31 December 2020
$ $
Inventory as at 25 December 2020 240,000
Add: Purchases (4) (5,000 x 90%) 4,500 0.5
244,500
Less: Returns outwards (2) 5,200 0.5
Product samples sent to customers (3) 2,400/1.2 2,000 0.5
Goods returned to suppliers (5) (1,200 x 90%) 1,080 0.5
Inventory stolen (6) (5,000 x ($12/1.2)) 50,000 (58,280) 0.5
Inventory as at 31 December 2020 186,220 0.5

9(d)
Prudence concept should be applied. 1
No accounting treatment is required. 1
Inventory should be valued at the lower of cost and net realizable value. 1
There is an increase in market value, but no change in cost. Thus the inventory should keep its value at cost. 1

9(e)
It is a bad sign. 1
The company is taking longer to collect trade receivables. 1
The company can do better credit control, such as shortening credit period, granting credit period only to
creditworthy customers, and making more effort to collect trade receivables. 1

10(a)
Sum Ying Company
Statement to show the value of sales for the year ended 31 December 2020
$ $
Discounts allowed (iv) 4,200 0.5
Cash at bank (ii) 25,500 0.5
Cash (ii) (3,000+1,500) 4,500 0.5
Trade receivable balance as at 31 December 2020 740,000 0.5
774,200
Less: Trade receivable balance as at 1 January 2020 (160,000) 0.5
Sales for the year ended 31 December 2020 614,200 0.5

Trade receivables
$ $
2020 2020
Dec 31 Balance b/d 160,000 Dec 1 Discounts allowed (iv) 4,200
Sales 614,200 Cash at Bank (ii) 25,500
Cash (ii) (3,000+1,500) 4,500
Balance c/f 740,000

774,200 774,200

Trade payable
$ $
2020 2020
Dec 31 Bank (5,200+3,200) (iii) 8,400 Dec 31 Balance b/f 18,000
Discounts received (iv) 4,900 Purchases 11,800
Balance c/f 16,500

29,800 29,800

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 14

 10(b)
Cash at bank
$ $
2020 2020
Dec 31 Balance b/d 86,800 Dec 31 Trade payable (iii) 8,400 0.5
0.5 Trade receivable (ii) 25,500 4% fixed deposit (vi) 10,000 0.5
0.5 Disposal of equipment 3,500 Bank loan (12,300-5,600) 6,700 0.5
Rent (viii) 50,000 0.5
Electricity (ix) 6,200 0.5
Staff salaries 19,000 0.5
Balance c/f 15,500
115,800 115,800

10(c)
Sum Ying
Income Statement for the year ended 31 December 2020
$ $
Sales 614,200
Less Cost of goods sold
Opening inventory 248,000
Purchases 11,800
259,800
Less Closing inventory (bal.figure) (68,540) (191,260) 0.5
Gross profit (614,200-10,000)x 70% 422,940 0.5
Discounts received 4,900 0.5
Interest income (10,000 x 4% x 6/12) 200 0.5
428,040
Less Expenses
Sundry expense 3,000 0.5
Discounts allowed 4,200 0.5
Loan interest 450 0.5
Rent (50,000+4,800-16,000) 38,800 0.5
Electricity (6,200+580) 6,780 0.5
Loss on disposal (50,000-3,500) 46,500 0.5
Staff salaries 23,000 0.5
Depreciation on equipment (240,000-50,000)/0.8 x 0.2 47,500 1
Managers’ bonus (428,040-170,230) x 0.1) 25,781 (196,011) 1
Net profit 232,029 0.5

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 15

10(d)
Sum Ying
Statement of financial position as at 31 December 2020
Cost Accumulated Net book value
depreciation
Non-current assets $ $ $
Equipment 237,500 95,000 142,500 1
4% Fixed deposit 10,000 0.5
152,500
Current assets
Inventory 68,540
Trade receivable 740,000
Prepaid expense 16,000 0.5
Accrued revenue 200 0.5
Bank 15,500
840,240
Less: Current liabilities
Trade payable 16,500
Accrued expense (450+580+25,781) 26,811 0.5
Bank loan 5,600 (48,911)
Net current assets 791,329 0.5
943,829

Financed by:
Capital
Balance as at 1 January 2020 709,300 0.5
Capital contribution 4,000 0.5
Net profit 232,029
945,329
Less: Drawings (1,500) 0.5
943,829

2021-F6-Mock-Business, Accounting and Financial Studies-2A p. 16