Books of original entry and ledgers (I)

Chapter 1 Books of original entry and ledgers (I) HKDSE (2016, 2) (Books of original entry and ledgers) ABC Company keeps the following four ledgers only: cash book, general ledger, purchases ledger and sales ledger. Indicate the accounts to be debited and credited, and the ledgers to be recorded for transactions (a) to (e) in the table below. Write your answers for items (1) to (20) in the answer book. Transaction Debit entry to be recorded Credit entry to be recorded Account Ledger Account Ledger e.g. Equipment purchased in cash Equipment General ledger Cash Cash book (a) Office rent paid by cheque (1) (2) (3) (4) (b) Goods purchased on credit (5) (6) (7) (8) (c) Bank loan acquired (9) (10) (11) (12) (d) Goods returned by credit customers (13) (14) (15) (16) (e) Interest income accrued (17) (18) (19) (20) Transaction Debit entry to be recorded Credit entry to be recorded Account Ledger Account Ledger e.g. Equipment purchased in cash Equipment General ledger Cash Cash book (a) Office rent paid by cheque Rent expenses General ledger Bank Cash book (b) Goods purchased on credit Purchases General ledger Trade payables Purchases ledger (c) Bank loan acquired Bank Cash book Bank loan General ledger (d) (e) Goods returned by credit customers Interest income accrued Returns inwards General ledger Interest receivable Trade receivables General ledger Interest income Sales ledger General ledger 1

HKDSE (2014, P1, 3) (Books of original entry and ledgers) 3. (a) Tony is the sole owner of a toy trading business. State the book of original entry for the recording of each of the following transactions of Tony s business: (i) (ii) (iii) Sold toys to customers on credit Received a credit note for toys returned Paid salaries to office clerks by autopay (b) From the accounts for recording the transactions in (a), identify one example for each of the following types of ledger accounts. (i) Real account (ii) Nominal account (a) (i) Sales journal (ii) Returns outwards journal (iii) Cash book (b) (i) accounts receivable / Debtors / Cash at bank (ii) sales / returns outwards / office salaries HKDSE (2013, 5) (Books of original entry and ledgers) 5. David is a sole proprietor who keeps records of his cash and bank transactions in a three-column cash book. The balances in the cash book as at 1 January 2013 were: cash $12,680 and bank overdraft $30,980. Transactions made in January 2013 were as follows: 2013 Jan 2 Received a cheque from a customer, Leung, who was given a cash discount of 2 1 2 % to settle his account of $150,000. The cheque was banked on the same day. 5 Paid a 20% deposit by cheque for the purchase of a motor van costing $200,000. The balance was to be paid on delivery two weeks later. 7 Received a cheque of $190,000 from Hilly Company as commission for work done. 14 Cash amounting to $8,790 from sales were deposited into the bank directly. 17 David withdrew $3,200 from the cash box to pay his son's school fees. 19 Paid the balance of the motor van purchased on 5 January by cheque. 24 Settled Kam Kee's account of $35,000 by cheque, with a cash discount of 3%. 28 Withdrew $9,000 from the bank and put the money in the cash box for business use. 30 Paid wages of $10,000 in cash and $20,000 by cheque. Write up a three-column cash book for January 2013. Cash Book Date Particulars Discount Cash Bank Date Particulars Discount Cash Bank 2013 $ 2013 $ Jan 1 Balance b/f 12,680 Jan 1 Balance b/f 30,980 " 2 Leung 3,750 146,250 " 5 Motor van 40,000 " 7 Commissions received 190,000 " 17 Drawings 3,200 " 14 Sales 8,790 " 19 Motor van 160,000 " 28 Bank 9,000 " 24 Kam Kee 1,050 33,950 2 " 28 Cash 9,000 " 31 Wages 10,000 20,000 " 31 Balance c/f 8,480 51,110 3,750 21,680 345,040 1,050 21,680 345,040

Class work 9 1. Write up the sales journal and the returns inwards journal to record the following transactions. Then post the journal entries to the relevant debtors account s in the accounts receivable ledger and show the transfers to the general ledger at the end of the month. 2009 Transactions Jul 1 Sold goods on credit to: A Sin for $1,880, K Fong for $770, C Chung for $880. " 6 Sold goods on credit to: S Tin for $1,180, K Fong for $660. " 10 Goods were returned to us from: A Sin of $120, C Chung of $170. " 20 Sold goods on credit to K Yong for $970. " 24 Goods of $50 were returned to us from S Tin. Sales Journal Date Details Amount 2009 $ Jul 1 A Sin 1,880 " 1 K Fong 770 " 1 C Chung 880 " 6 S Tin 1,180 " 6 K Fong 660 " 20 K Young 970 " 31 Total credit sales for the month 6,340 Returns Inwards Journal Date Details Amount 2009 $ Jul 10 A Sin 120 " 10 C Chung 170 " 24 S Tin 50 " 31 Total return inwards for the month 340 Accounts Receivable Ledger A Sin 2009 $ 2009 $ Jul 1 Sales 1,880 Jul 10 Returns inwards 120 K Fong 2009 $ Jul 1 Sales 770 " 6 Sales 660 C Chung 2009 $ 2009 $ Jul 1 Sales 880 Jul 10 Returns inwards 170 S Tin 2009 $ 2009 $ Jul 6 Sales 1,180 Jul 24 Returns inwards 50 K Young 2009 $ Jul 20 Sales 970 General Ledger Sales 2009 $ Jul 31 Total credit sales for the month 6,340 Returns Inwards 2009 $ Jul 31 Total for the month 340 3

HKCEE (2008, 1) (Basic Accounting) Amanda is the sole owner of a business engaged in the trading of telephone sets. With her limited knowledge of accounting, she tries to do the accounting work herself. She remembers that all transactions should first be recorded in the books of original entry before posting to ledger accounts, and that the trial balance will help to locate accounting errors. REQUIRED: Advise Amanda on the following: (a) What is the book of original entry for the recording of each of the transactions below? Book of Original Entry (i) Bought telephone sets for resale by cash? (ii) Sold telephone sets to customers on credit? (iii) Received a credit note from a supplier for telephone sets returned? (iv) Gave full allowance to a customer for telephone sets returned? (v) Acquired office premises by a mortgage loan? (vi) Paid wages and salaries by autopay? (vii) Accrued for outstanding electricity charges as at year end? (b) (c) Form the transactions in (a) above, identify two examples for each of the following: (i) Real accounts (ii) Nominal accounts (iii) Personal accounts What are the types of accounting errors that will not be revealed by a trial balance? State four of them. (a) (i) Cash book (ii) Sales day book/sales journal (iii) Returns outwards day book/ Returns outwards journal (iv) Returns inwards day book/ Returns inwards journal (v) The Journal/ General journal (vi) Cash book (vii) The Journal/ General journal (b) (i) Real accounts cash/bank, office premises, loan, accrued charges, debtors, creditors, stock (ii) Nominal accounts sales, purchases, return outwards, returns inwards, wages and salaries, electricity expense (iii) Personal accounts debtors, creditors (c) error of omission error of complete reversal error of commission error of principle compensating errors error of original entry 4

Chapter 3 Accruals and prepayments ( 應計與預付項目 ) Accrued expenses ( 應計費用 ) Accrued revenues ( 應計收益 ) Dr Expense account Dr Accrued revenue account Cr Accrued expense account Cr Revenue account Prepaid expenses ( 預付費用 ) Unearned revenues ( 未獲收益 ) Dr Prepaid expense account Dr Revenue account Cr Expense account Cr Unearned revenue account Longman (2012, Dec, 2) (Accrual and Prepayment) 2. The first year of trading ended on 31 December 2011 and the following information is available. (i) Motor vehicle expenses: The business paid $28,000 on 31 November 2011 and owed $3,950 as at 31 December 2011. (ii) Commission revenue: The business received commissions totalling $47,980 on 1 December 2011 but commissions of $7,890 for December 2011 were not yet received at the year end. (iii) Insurance: The business paid $39,500 on 15 December 2011, including a sum of $8,400 on 1 October 2011 for annual fire insurance ending 30 September 2012. REQUIRED: Prepare the above journal and edger accounts for the year ended 31 December 2011. Journal Details Dr Cr (i) Motor vehicle expenses 28,000 Bank 28,000 Motor vehicle expenses 4,000 Accrued expenses 4,000 (ii) Bank 47,980 Commission Revenue 47,980 Accrued Commission Revenue 7,890 Commission Revenue 7,890 (iii) Insurance 39,500 Bank 39,500 Prepaid Insurance ($8,400 9/12) 6,300 Insurance ($8,400 9/12) 6,300 (i) Motor vehicle expenses 2011 $ 2011 $ Nov 31 Bank 28,000 Dec 31 Profit and loss 31,950 " 31 Accrued c/f 3,950 31,950 31,950 (ii) Commission Revenue 2011 $ 2011 $ Dec 31 Profit and loss 55,870 Dec 1 Bank 47,980 " 31 Accrued c/f 7,890 55,870 55,870 (iii) Insurance 2011 $ 2011 $ Dec 15 Bank 39,500 Dec 31 Profit and loss 33,200 " 31 Prepaid c/f ($8,400 9/12) 6,300 39,500 39,500 5

Chapter 4 4.2 Bad debts ( 壞帳 ) 1. Write off a bad debt ( 記錄壞帳 ) Dr Bad debt account Cr Debtor s account Bad debts and allowance for doubtful accounts 2. Transferring the total of bad debts to the profit and loss account ( 把壞帳總額轉到損益帳戶 ) Dr Profit and loss account Cr Bad debts account 4.3 Bad debts recovered ( 壞帳收回 ) The bad debt was recovered in the same accounting period ( 在同一會計期內收回 ) 1. Deducting the written off bad debts in the debtors and bad debts account ( 扣回在壞帳帳戶及債仔已註銷的 壞帳款項 ) Dr Debtor s account Cr Bad debts account 2. Recording the receipt of payment ( 記錄收取債仔款項 ) Dr Cash book (or Bank/Cash account) Cr Debtor s account The bad debt was recovered in a later accounting period ( 在其後的會計期收回 ) 1. Restating the debt in the debtor s account ( 把壞帳收回重列在壞帳收回及債仔帳戶內 ) Dr Debtor s account Cr Bad debts recovered account 2. Recording the receipt of payment ( 記錄收取債仔款項 ) Dr Cash book (or Bank/Cash account) Cr Debtor s account 3. Transferring the total of bad debts recovered to the profit and loss account at the end of an accounting period ( 在會計期末, 把壞帳收回總額轉到損益帳戶 ) Dr Bad debts recovered account Cr Profit and loss account 4.4 Allowance for doubtful accounts ( 呆帳準備 ) When the allowance is made for the first time ( 首次作呆帳準備 ) Dr Profit and loss account Cr Allowance for doubtful accounts account When the allowance is made in subsequent periods ( 其後的會計期所作的呆帳準備 ) (a) An increase in the allowance should be recorded as an expense ( 把增加了的準備視為費用 ) Dr Profit and loss account ( 增加了的呆帳準備 ) Cr Allowance for doubtful accounts account ( 增加了的呆帳準備 ) (b) A decrease in the allowance should be recorded as other revenue ( 把減少了的準備視為其他收益 ) Dr Allowance for doubtful accounts account ( 減少了的呆帳準備 ) Cr Profit and loss account ( 減少了的呆帳準備 ) 6

Longman (2012, Feb, 2) (Bad debts) 1 Victory Ltd commenced business on 1 January 2011 and information concerning its accounts receivable for the first two years of operations is as follows: (i) As at 31 December 2011, accounts receivable totalled $468,000. A trade debtor, Treasure Ltd, which owed the company $7,800, was in serious financial difficulty and the company had to write off 50% of the sum as bad. (ii) The company decided to create an allowance for doubtful accounts of 5% on the remaining accounts receivable. (iii) On 15 July 2012, Treasure Ltd repaid by cheque the amount written off as bad in the previous year. (iv) As at 31 December 2012, accounts receivable totalled $598,000. The allowance for doubtful accounts was to be maintained at 5% of accounts receivable. Required: Prepare the required journal entries for the above items and allowance for doubtful debts account. The Journal Details Dr Cr (i) Bad debts ($7,800 50%) 3,900 Treasure Ltd (accounts receivable) 3,900 (ii) Profit and loss Allowance for doubtful accounts [($468,000 $3,900) 5%] 23,205 Allowance for doubtful accounts 23,205 (iii) Treasure Ltd (accounts receivable) 3,900 Bad debts recovered 3,900 Bank 3,900 Treasure Ltd (accounts receivable) 3,900 (iv) Profit and loss Increase in allowance for doubtful accounts 6,695 Allowance for doubtful accounts [($598,000 5%) $23,205] 6,695 Allowance for Doubtful Debts 2011 $ 2011 $ Dec 31 Balance c/f 23,205 Dec 31 Profit and loss 23,205 2012 2012 Dec 31 Balance c/f 29,900 Jan 1 Balance b/f 23,205 Dec 31 Profit and loss 6,695 29,900 29,900 HKDSE (2014, 1) (Control and Bad debts) The trade receivables of A&B Company as at 1 December 2013 amounted to $564,300. The opening balance of the allowance for doubtful debts account as at 1 January 2013 amounted to $38,000. Suppose the company estimated that 6% of the trade receivables as at 31 December 2013 was doubtful. Prepare the journal entry for adjusting the allowance for doubtful debts as at 31 December 2013. Journal Date Details Dr Cr 2013 Dec 31Allowance for Doubtful Accounts 4,142 Profit and loss Decrease in allowance [$38,000 ($564,300 x 6%)] 4,142 7

Chapter 5 Depreciation of non-current assets ( 非流動資產折舊 ) Capital expenditure ( 資本支出 ) Revenue expenditure ( 收益支出 ) Straight-line method ( 直線法 ) 1. depreciation charged per period = (cost residual value) useful life 每期的折舊額 = ( 成本 預計剩餘價值 ) 估計使用期限 2. depreciation charged per period = cost x fixed depreciation rate 每期的折舊額 = 成本 x 固定折舊率 Reducing-balance method ( 餘額遞減法 ) depreciation charged in each period = (cost depreciation already charged) x fixed depreciation rate 每期的折舊額 = ( 成本 已計折舊 ) 固定折舊率 Accounting entries for depreciation ( 折舊所需的會計分錄 ) 1 Record the depreciation charged for an accounting period ( 記錄會計期內的折舊 ) Dr Depreciation account Cr Accumulated depreciation account Disposal of non-current assets ( 非流動資產變賣 ) (a) Profit on disposal ( 變賣利潤 ) Journal Details Dr Cr Accumulated depreciation Furniture 10,000 Cash 40,000 Profit and loss Profit on disposal 20,000 Furniture 30,000 (b) Loss on disposal ( 出現變賣損失 ) Journal Details Dr Cr Accumulated depreciation Furniture 10,000 Cash 10,000 Profit and loss Loss on disposal 10,000 Furniture 30,000 Trade-in of non-current assets ( 非流動資產的易新 ) Journal Details Dr Cr Accumulated depreciation Office Furniture 20,000 Office Furniture: Trade-in allowance 20,000 Profit and loss Profit on disposal 10,000 Office Furniture 30,000 Office Furniture 40,000 Bank/Cash/Debtor 40,000 8

3. Valor Company acquired a machine on 1 January 2002. The machine has an estimated useful life of five years. The depreciation charge for the first three years was calculated for this machine using two different depreciation methods as follows: Year Straight-line method Reducing-balance method (5 years) (50% per annum) 2002 $12,400 $32,000 2003 $12,400 $16,000 2004 $12,400 $8,000 (a) Calculate the cost of the machine and its estimated residual value. (b) Prepare journal entries to record the disposal of the machine based on the straight-line method, assuming that the machine was sold on 30 September 2005 for $36,000 on credit. (Narrations are not required.) (a) Cost of the machine = $32,000 50% = $64,000 Estimated residual value of the machine = $64,000 $12,400 x 5 = $2,000 (b) The Journal Date Details Dr Cr 2005 Sept 30 Accumulated depreciation machinery ($12,400 x 3 + $12,400 x 9/12) 46,500 Debtor 36,000 Profit and loss Profit on disposal of machinery 18,500 Machinery 64,000 1 ST Mock Exam 2012-2013 (Depreciation) 2. (i) On 1 October 2010, an old motor vehicle costing $350,000 with a net book value of $100,000 as at 1 January 2010 was trade-in for a new one. A trade-in allowance of $9,000 was given. The list price of a new vehicle is $400,000 and a trade discount of 10% was allowed. Ocean Limited paid $2,400 for annual license fee, $10,000 for installing an air-conditioning system in the motor vehicle and $3,000 for freight charges. The scrap value of the new machine is $4,000. (ii) Motor vehicle 20% on reducing balance method per annum REQUIRED: (a) Calculate the cost of new vehicle to be capitalized. (b) Prepare journal entries to record the trade-in of the motor vehicle. (a) $ Purchases price ($400,000 x 90%) 360,000 Air-conditioning system 10,000 Freight charges 3,000 Cost of motor vehicle 373,000 (b) Journal Debit Credit Accumulated depreciation Motor vehicle [$100,000 x 20% x 9/12 + ($350,000 $100,000)] 265,000 Motor vehicle trade-in allowance 9,000 Profit and loss Loss on disposal 76,000 Motor vehicle 350,000 Motor vehicle ($373,000 $9,000) 364,000 Bank 364,000 9

Chapter 7 Bank reconciliation statements ( 銀行往來調節表 ) 7.3 Cause of the different between the cash book and bank statement balances ( 導致現金簿與銀行結單餘額出現差異的原因 ) Items have been recorded in the bank statement but not yet recorded in the cash book ( 項目已記錄在銀行結單內, 但尚未記錄在公司現金簿內 ) Items have been recorded in the cash book but not yet recorded in the bank statement ( 項目已記錄在公司現金簿內, 但尚未記錄在銀行結單內 ) 7.3.1 Entries made in the bank statement but not yet entered in the cash book ( 項目已記錄在銀行結單內, 但尚未記錄在公司現金簿內 ) 1 Standing orders and direct debits (Withdraw) ( 定期支付指示及直接借記 ) 2 Direct credits (Deposit) ( 直接貸記 ) 3 Bank charge and interest (Withdraw) ( 銀行手續費和利息 ) 4 Dishonoured cheques (Cancelled cheques) ( 拒付支票 ) 7.3.2 Entries made in the cash book but not yet entered in the bank statement ( 項目已記錄在公司現金簿內, 但尚未記錄在銀行結單內 ) 1 Unpresented cheque (payment) ( 未兌現支票 ) 2 Uncredited item (receipt) ( 未貸記項目 ) 7.4 Bank reconciliation statements ( 銀行往來調節表 ) 7.4.1 銀行往來調節表的功能 7.4.2 Preparation of a bank reconciliation statement ( 編製往來調節表 ) We first need to cross out ( 劃掉 ) all the items that appear in both cash book and the bank statement. Cash Book Bank Bank 2009 $ 2009 $ Oct 1 Balance b/d 18,500 Oct 5 P Sun 7,500 13 D Fung 3,000 14 R Kwok 2,000 22 W Pang 1,600 24 H Lo 4,300 31 K Chan (A) 2,200 30 C Man (B) 1,900 31 Balance c/d 9,600 25,300 25,300 Bank Statement Date Details Dr Cr Balance 2009 $ Oct 1 Opening balance 18,500 Cr 10 P Sun 7,500 11,000 Cr 15 R Kwok 2,000 9,000 Cr 18 D Fung 3,000 12,000 Cr 19 Credit transfer L Yeung (C) 700 12,700 Cr 20 Bank charges (D) 300 12,400 Cr 25 H Lo 4,300 8,100 Cr 26 W Pang 1,600 9,700 Cr 29 Loan interest (E) 1,100 8,600 Cr 31 Direct credit Dividend (F) 200 8,800 Cr 31 Closing balance 8,800 Cr The uncrossed out items ( 沒有被劃掉的項目 ) are the causes of differences ( 引致差異的原因 ). 10

Preparation of a bank reconciliation statement ( 編製往來調節表 ) 2 With the cash book updated ( 先更新現金簿 ) Cash Book Bank Bank 2009 $ 2009 $ Oct 31 Balance b/d 9,600 Oct 31 Bank charges (D) 300 31 L Yeung Credit transfer (C) 700 31 Loan interest (E) 1,100 31 Dividend Direct credit (F) 200 31 Balance c/d 9,100 10,500 10,500 Starting with the unadjusted cash book balance and ending with bank statement balance Bank Reconciliation Statement as at 31 October 2009 $ Adjusted balance as per cash book 9,100 Add Unpresented cheque (B) 1,900 11,000 Less Uncredited cheque (A) (2,200) Balances as per bank statement 8,800 Example 4: The following is the cash book (bank columns) of C Hung s business for December 2008. Cash Book (Bank) 2008 $ 2008 $ Dec 6 T Lui 155 Dec 5 Balance b/d 3,872 20 K Po 189 10 P Woo 206 31 H Tang 211 19 M Kwok 315 31 Balance c/d 3,922 29 T Fang 84 4,477 4,477 Bank Statement Date Details Dr Cr Balance 2008 $ Dec 1 Balance b/d 3,872 Dr 7 Cheque 155 3,717 Dr 13 Cheque 206 3,923 Dr 21 Cheque 189 3,734 Dr 22 Cheque 315 4,049 Dr 30 Standing order Mercantile Ltd 200 4,249 Dr 31 Direct credit K Sung 180 4,069 Dr 31 Bank charges 65 4,134 Dr (a) Update the cash book Cash Book (Bank) 2008 $ 2008 $ Dec 31 K Sung Direct credit 180 Dec 31 Balance b/d 3,922 31 Balance c/d 4,007 31 Mercantile Ltd Standing order 200 31 Bank charges 65 4,187 4,187 (b) Draw up a bank reconciliation statement as at 31 December 2008, starting with the corrected cash book balance. Bank Reconciliation Statement as at 31 December 2008 $ Adjusted overdraft balance as per cash book (4,007) Add Unpresented cheque 84 (3,923) Less Uncredited cheque (211) Overdraft balance as per bank statement (4,134) 11

HKDSE Sample 2 (2A, 1) (Bank Rec) The bank account of VM Ltd as at 31 December 2011 has a debit balance of $4000, which was different from the ending balance shown on the bank statement for the month of December 2011. Subsequent comparison of the cash book with the bank statement revealed the following: (i) Bank charges of $469 shown on the bank statement had not been recorded in the cash book. (ii) Cash of $7933 deposited by a customer on 20 December 2011 had been credited by the bank but no record had been made in the cash book. (iii) The following cheques issued to suppliers were not shown on the bank statement: Cheque Number Date of issue Amount 30801 17 December 2011 $2453 30834 30 December 2011 $3758 (iv) A cheque with an amount of $5100 deposited into the bank on 31 December 2011 was shown on the bank statement for the month of January 2012. REQUIRED: (a) Update the bank account in the books of VM Ltd. (b) Prepare for VM Ltd a bank reconciliation statement as at 31 December 2011, commencing with the updated bank account balance in (a). (c) List two uses of bank reconciliation statement for a company. (a) Cash Book 2011 $ 2011 $ Dec 31 Balance b/d 4,000 Dec 31 Bank charges (i) 469 31 Trade receivables (ii) 7,933 31 Balance c/d 11,464 11,933 11,933 (b) VM Ltd Bank reconciliation Statement as at 31 December 2011 Balance as per adjusted bank account 11,464 Add: Unpresented cheques (iii) 30801 2,453 30834 3,758 6,211 17,675 Less: Uncredited deposit (iv) 5,100 Balance as per bank statement 12,575 (c) Uses: locating accounting errors either made by the bank or by the firm explaining differences at a given date between the balance of the bank account as shown in the firm s cash book and the balance of bank statement as prepared by the bank preventing fraud by employees 12

HKDSE (2012, 5) (Bank Rec) The following information was extracted from the cash book of Doris Ltd for the month ended 31 December 2011: Cash at bank 2011 $ 2011 Cheque No. $ Dec 4 Cindy Ltd 125 000 Dec 1 Balance b/d 10 500 5 Connie Fashion Co 25 300 12 Electricity 532018 2 820 20 Chloe Ltd 72 530 13 Yuki Co 532019 24 500 28 Carmen Co 7 235 22 Zoey & Co 532020 31 600 31 Cherry Ltd 8 005 22 Salaries 532021 109 420 31 Balance c/d 9 530 31 Clara Co 532022 68 760 247 600 247 600 Doris Ltd received the following bank statement for the month of December 2011: Bank Statement as at 31 December 2011 Date Description Withdrawal Deposit Balance 2011 $ Dec 1 Balance b/d (10 000) 4 Cheque deposit 125 000 115 000 5 Cheque deposit 23 500 138 500 8 Cheque 532010 300 138 200 12 Cheque 532018 2 820 135 380 13 Cheque 532019 24 500 110 880 20 Cheque deposit 72 530 183 410 22 Cheque 532021 109 420 73 990 23 Refer to drawer 72 530 1 460 30 Credit transfer 46 250 47 710 31 Direct debit management fees 5 025 42 685 31 Bank charges 25 42 660 31 Cheque 982277 105 660 (63 000) Additional information: (i) A cheque for $23 500 received from Connie Fashion Co was wrongly recorded in the cash book as $25 300. Also, it was discovered that the cheque received from Carmen Co on 28 December 2011 was dated 2 January 2012. (ii) The credit transfer on 30 December 2011 shown on the bank statement was made by a customer of Doris Ltd. (iii) Doris Ltd had been informed by its bank that Cheque 982277 was an incorrect debit entry and the correction would be made by the bank on 5 January 2012. (iv) The reason for the difference in the opening balances of the cash at bank account and the bank statement was due to two cheques, 532009 and 532010, issued in November 2011 remained unpresented on 30 November 2011. REQUIRED: (a) Update the cash at bank account of Doris Ltd. (b) Prepare a bank reconciliation statement as at 31 December 2011, commencing with the updated cash at bank balance. (c) List two possible reasons why the cheque deposit made on 20 December 2011 was returned by the bank on 23 December 2011. 13

(a) Cash Book 2011 $ 2011 $ Dec 31 Debtors credit transfer (ii) 46 250 Dec 31 Balance b/d 9 530 31 Balance c/d 49 895 31 Connie Fashion Co (i) 1 800 31 Carmen Co Post-dated cheque (i) 7 235 31 Chloe Ltd Returned cheque 72 530 31 Management fees 5 025 31 Bank charges 25 96,145 96,145 (b) Bank Reconciliation Statement as at 31 December 2011 updated overdraft balance as per cash book (49 895) Add Unpresented cheques 532020 31 600 532022 68 760 532009 ($10 500 $10 000 $300) (iv) 200 100 560 50 665 Less Uncredited deposit Cherry Ltd 8 005 Bank error incorrect debit (iii) 105 660 113 665 Balances as per bank statement (63,000) Unpresented cheque 532009 + Unpresented cheque 532010 = $10 500 $10 000 = $500 Unpresented cheque 532009 + $300 = $500 Unpresented cheque 532009 = $500 $300 = $200 (c) insufficient cash in drawer s account post-dated cheque wrong drawee s name/drawers signature 14

Chapter 8 Correction of Errors [I]: Errors Not Affecting Trial Balance Agreement 8.2 Error of commission ( 帳名調亂錯誤 ) 8.3 Error of principle ( 原則性錯誤 ) 8.4 Error of omission ( 遺漏錯誤 ) 8.5 Error of original entry ( 原始分錄錯誤 ) 8.6 Complete reversal of entries ( 顛倒入帳 ) 8.7 Compensating errors ( 抵銷性錯誤 ) HKCEE (2010, 7) (Correction Errors) All normal sales of Tess Company are made at a gross profit of 40% on cost. Subsequent checking of the records revealed the following: (iii) Withdrawal of goods with a selling price of $2,800 by the owner had been incorrectly recorded as a credit sale to a customer, Russ Company. (iv) A contra entry of $792 in the debtors and creditors accounts had been incorrectly recorded as $972. (v) (vi) A cash discount of $700 received from a supplier was treated as a trade discount. A payment for telephone expenses of $300 for the owner was recorded as a telephone payment for the business. (vii) Goods with a cost of $1,000 were sold to a customer at a special discount of 10%. This transaction had been recorded as a normal credit sale. (viii) A credit sale of office equipment for $10,000 was incorrectly treated as a credit sale of a fully depreciated motor vehicle with a cost of $100,000. The office equipment had a cost and accumulated depreciation of $80,000 and $64,000 respectively on 31 December 2009. REQUIRED: (a) Prepare the necessary journal entries to correct the above. Narrations are not required. Journal (iii) Sales 2,800 Debit Credit Debtor Russ Company 2,800 Drawings ($2,800 140%) 2,000 Purchases 2,000 (iv) Debtors ($972 $792) 180 Creditors 180 (v) Purchases 700 Discounts received 700 (vi) Drawings 300 Telephone expenses 300 (vii) Sales ($1,000 x 140% x 10%) 140 Debtors 140 (viii) Accumulated depreciation office equipment 64,000 Motor vehicles 100,000 Profit and Loss Loss on disposal 16,000 Accumulated depreciation motor vehicles 100,000 Office equipment 80,000 15

8.8 Errors in year-end adjustments ( 期末調整的錯誤 ) 8.8.1 Errors in the charging of depreciation ( 折舊計算的錯誤 ) 8.8.2 Errors in the allowance for doubtful accounts ( 呆帳準備的錯誤 ) 8.8.3 Errors in the treatment of accruals and prepayments ( 應計和預付項目的錯誤 ) 8.8.4 Errors in the valuation of inventories ( 存貨計價的錯誤 ) Class work 11 1. For each of the independent situations described below, prepare journal entries to show the necessary adjustment. (iv) An accrued expense of $700 had been recorded as a prepaid expense and the expenses accounts are closed. (v) The accrued expenses of $180 should have been prepaid expenses and the expenses accounts are closed. (vi) The firm had $11,250 in wages and salaries outstanding as at 31 March 2010 but this had not been recorded and the wages and salaries account is closed. (vii) As at 31 December 2010, prepaid rent and accrued telephone expenses amounted to $500 and $300, respectively. No entry had been made in the books and the expenses accounts are closed. (viii) As at 30 April 2010, prepaid repair costs and accrued rent revenue amounted to $210 and $1,700, respectively. No entry had been made in the books. (ix) As at 30 June 2012, prepaid wages and accrued miscellaneous expenses were $1,000 and $1,300, respectively. No entry had been made in the books and the expenses accounts are closed. (x) The sales account was credited with $24,000 for goods (costing $20,000) sent to an agent on a sale or return basis. It was ascertained that only half of the goods were sold by the year-end. None of the goods were included in the firm's closing inventory. Journal Dr Cr Details (iv) Profit and loss Expenses ($700 x 2) 1,400 Prepaid expense 700 Accrued expense 700 (v) Accrued expenses 180 Prepaid expenses 180 Profit and loss ($180 x 2) 360 (vi) Profit and loss Wages and salaries 11,250 Accrued expenses 11,250 (vii) Prepaid expenses 500 Profit and loss Rent 500 Profit and loss Telephone expenses 300 Accrued expenses 300 (viii) Prepaid expenses 210 Repair costs 210 Accrued revenue 1,700 Rent revenue 1,700 (ix) Prepaid expenses 1,000 Profit and loss Wages and salaries 1,000 Profit and loss Miscellaneous expenses 1,300 Accrued expenses 1,300 (x) Profit and loss Sales ($24,000 x 50%) 12,000 Accounts receivable 12,000 Inventory ($20,000 x 50%) 10,000 Profit and loss Closing inventory 10,000 16

Chapter 9 Correction of Errors [II]: Errors Affecting Trial Balance Agreement 9.2 Suspense account ( 暫記帳戶 ) 9.3 Errors affecting trial balance agreement ( 影響試算表平衡的錯誤 ) 1 Casting error in a book of original entry ( 原始分錄簿加總出錯 ) 2 Single entry ( 單式記帳 ) 3 Double entry of unequal amounts ( 不同金額的複式記帳 ) 4 Incorrect casting of an account ( 帳戶加總出錯 ) 5 Incorrect listing of balance in the trial balance ( 試算表錯列餘額 ) Class work 2 1. (a) Show the journal entries to correct the following errors that affected the trial balance. (iii) Purchases were overcast by $1,000. (vi) A cheque of $450 paid for rates was correctly entered in the cash book, but had not been posted to any ledger account. (vii) Discounts allowed amounting to $1,700 were credited to the discounts received account. (ix) Commission received of $750 was debited to the sales account. (x) Drawings of $305 were credited to the capital account. Journal Details Dr Cr (iii) Suspense 1,000 Purchases 1,000 (vi) Rates 450 Suspense 450 (vii) Discounts allowed 1,700 Discounts received 1,700 Suspense 3,400 (ix) Suspense 1,500 Commission 750 Sales 750 (x) Capital 305 Drawings 305 Suspense 610 9.4 Adjustments of profits ( 利潤調整 ) Journal Details Dr Cr Net profit (i) Profit and loss Purchases 279 Accounts payable 279 (ii) Profit and loss Wages 12,800 Building 12,800 (iii) Suspense 390 Profit and loss Dividend revenue 390 17 Decrease Decrease Increase 9.5 Adjustments of working capital ( 營運資金調整 ) Journal Details Dr Cr Working capital (i) Suspense 1,500 Accounts receivable Charles 1,500 (ii) Suspense 200 Profit and loss Purchases 200 (iii) Cash 500 Suspense 500 Decrease Nil Increase

Chapter 10 Financial Statements for Partnerships ( 合夥的財務報表 ) Profit and Loss Appropriation( 損益分配帳戶 ) 2010 $ 2010 $ Dec 31 Interest on capital Dec 31 Profit and loss (net profit) 90,000 Capital: Chan ($40,000x5%) 2,000 31 Interest on drawings Capital: Ng ($30,000x5%) 1,500 Capital: Chan ($9,000x10%x1/2) 450 31 Salary to partner Capital: Ng 10,000 Capital: Ng ($60,000x10%x1/2) 300 31 Share of profit Capital: Chan (2/3) 51,500 Capital: Ng (1/3) 25,750 77,250 2 / 3 51,500 77,250 1/ 3 25,750 90,750 90,750 Chapter 12 Partnership revaluation ( 合夥重估 ) Revaluation $ Motor vehicles ($35,500 $26,000) 9,500 Buildings ($175,000 $80,000) 95,000 Inventory ($20,400 $18,900) 1,500 Office fittings ($13,100 $10,900) 2,200 Profit on revaluation Capital: Tai (5/10) 40,900 Capital: Suen (3/10) 24,540 Capital: Chung (2/10) 16,360 81,800 95,000 95,000 Chapter 13 Partnership Dissolution ( 合夥解散 ) Realisation $ Office equipment (1) 40,000 Bank Office equipment (2) 48,000 Motor vehicles (1) 25,000 Bank Inventory (2) 27,000 Inventory (1) 21,000 Bank Accounts receivable (2) 20,400 Accounts receivable (1) 22,400 Capital: Lee - Motor vehicles taken over (3) 22,000 Bank Dissolution costs (5) 2,600 Accounts payable Discounts received (4) 2,000 Profit on realization (6) Capital: Chan (2/3) 5,600 Capital: Lee (1/3) 2,800 8,400 119,400 119,400 Example 1 Chan and Ng established a partnership on 1 January 2010. They agreed to share profits and losses in the ratio of 2 : 1. Net profit for the year amounted to $90,000. Other information for the year ended 31 December 2010 is as follows: 1 Capital account balances as at 1 January 2010: Chan $40,000, Ng $30,000 2 Rate of interest on capital: 5% per annum. 3 Rate of interest on drawings: 10% per annum. 4 Ng was entitled to an annual salary of $10,000. 5 Drawings made on 1 July 2010: Chan $9,000, Ng $6,000. Draw up the Profit and Loss Appropriation accounts of the partners. Profit and Loss Appropriation Interest on capital Profit and loss (net profit) 90,000 Capital: Chan ($40,000x5%) 2,000 Interest on drawings Capital: Ng ($30,000x5%) 1,500 Capital: Chan ($9,000x10%x1/2) 450 Salary to partner Capital: Ng 10,000 Capital: Ng ($6,000x10%x1/2) 300 Share of profit Capital: Chan (2/3) 51,500 Capital: Ng (1/3) 25,750 90,750 90,750 18

HKDSE (2016, 5) (Correction of errors) Chu and Yam have been in partnership for many years, sharing profits and losses in the ratio of 3 : 2. The statement of financial position as at 31 December 2015 was drafted as follows: $ Property, net 782,000 Inventory 266,600 Trade receivables 230,000 Cash 41,400 1,320,000 Capital Chu 705,000 Capital Yam 45,000 Bank loan 15,000 Trade payables 555,000 1,320,000 On 1 January 2016, Mak was admitted as a new partner on the following terms: (i) Chu, Yam and Mak would share profits and losses in the ratio of 3 : 2 : 1. (ii) Goodwill was to be valued at $150,000. No goodwill account was to be maintained in the books. (iii) Property and inventory were to be revalued at $2,020,000 and $133,200 respectively. (iv) An allowance for doubtful debts of 1% was to be made. (v) Professional fees of $26,200 were paid in cash for the revaluation of assets. (vi) The initial capital of the new partnership would be $1,500,000, to be contributed by Chu, Yam and Mak in the ratio of 40%, 35% and 25% respectively. Any surplus or deficit would be adjusted through partners injection or withdrawal of cash. REQUIRED: (a) Prepare the following accounts: (i) revaluation account for the admission of Mak (ii) capital accounts of the partners as at 1 January 2016 in columnar form, showing the admission of Mak. (b) Give two factors that affect the value of goodwill of a company. (a) (i) Revaluation $ Inventory ($266,600 $133,200) 133,400 Property ($2,020,000 $782,000) 1,238,000 Allowance for doubtful accounts 2,300 Cash Professional fees 26,200 Profit on revaluation Capital: Chu (3/5) 645,660 Capital: Yam (2/5) 430,440 1,076,100 1,238,000 1,238,000 19

(a) (ii) Goodwill Adjustment Partner Goodwill shared in old ratio Goodwill shared in new ratio Chu (3/5) $90,000 (3/6)$75,000 Yam (2/5) $60,000 (2/6)$50,000 Mak (1/6)$25,000 $150,000 $150,000 Capital Chu Yam Mak Chu Yam Mak Goodwill (3 : 2 : 1) 75,000 50,000 25,000 Balances b/f 705,000 45,000 Cash 765,660 Goodwill (3 : 2) 90,000 60,000 Balance c/d 600,000 525,000 375,000 Revaluation Share of profit 645,660 430,440 Cash 39,560 400,000 1,440,660 575,000 400,000 1,440,660 575,000 400,000 (b) Reputation of the company Relationships with suppliers and customers Efficiency of management and employees Quality of the products The performance of social responsibilities 20

HKCEE (2006, 6) Ann, Ben and Joe were partners sharing profits and losses in the ratio of 2 : 2 : 3. The balance sheet as at 30 April 2006 was as follows: The liquidity of the partnership worsened during the past two years and so the partners decided to dissolve the partnership on 1 May 2006. The following information was provided: (i) The office equipment was sold at a price of 30% below (ii) Ann took over the motor vehicle to set off her loan to the partnership. (iii) Most of the furniture was sold at an agreed value of $35,000. The remaining furniture was donated to a charitable orgainisation and Ben paid $200 on behalf of the partnership for transporting the furniture. (iv) Part of the stock was sold at 90% of its net realizable value of $100,000. The remaining stock was taken over by Ben at an agreed value of $9,750. (v) A debt of $2,000 was to be written off and a cash discount of 2% was allowed on the remaining debtors. (vi) The creditors were settled and a discount of 5% was received on 50% of the creditors. (vii) Realisation expenses amounted to $2,100. (viii) Joe was unable to meet his liability to the partnership. His deficiency was to be borne by Ann and Ben in their profit and loss sharing ratio. You are required to prepare: (a) the realization account; (b) the bank account; and (c) the partners capital accounts in columnar form, showing the final settlement among them. 21

(a) Realisation $ Office equipment 325,000 Bank Office equipment (325,000 x 70%) 227,500 Furniture 72,900 Furniture 35,000 Motor vehicle 116,800 Stock (100,000 x 90%) 90,000 Stock 126,000 Debtors [(37,000 2,000) x 98%] 34,300 Debtors 37,000 Loan nn: motor vehicle 100,000 Capital Ben: transportation expenses 200 Capital Ben: Stock 9,750 Realisation expenses 2,100 Creditors discounts received (86,000 x 50% x 5%) 2,150 Share of loss: Ann (2/7) 51,800 Ben (2/7) 51,800 Joe (3/7) 77,700 181,300 680,000 680,000 (b) Bank Realisation Office equipment 227,500 Balance b/f 120,400 Furniture 35,000 Creditors (86,000 2,150) 83,850 Stock (100,000 x 90%) 90,000 Realisation expenses 2,100 Debtors [(37,000 2,000) x 98%] 34,300 Capital: Ann 134,150 Ben 46,300 386,800 386,800 (c) Capital Ann Ben Joe Ann Ben Joe Current account 16,000 Balances b/d 160,000 95,000 80,000 Realisation Stock 9,750 Current account 32,800 19,500 Realisation Share of loss 51,800 51,800 77,700 Realisation transportation 200 Share of Joe s deficiency (1 : 1) 6,850 6,850 Deficiency 13,700 Bank 134,150 46,300 192,800 114,700 93,700 192,800 114,700 93,700 22

Chapter 14 Issue of shares and debentures ( 發行股份及債券 ) 14.3.2 Accounting entries for the issue of shares ( 發行股份的會計分錄 ) A Shares issued at par ( 股份按面值發行 ) On 1 December 2010, JJ Ltd announced a public offering of 100,000 ordinary shares of $4 each at par. On 10 December 2010, applications together with application monies were received for 150,000 shares. The shares were allotted to the applicants two days later and the excess application monies were refunded on the same day. 1 Receipt of application monies: ( 收取申請認購股款 ) Dr Bank account $600,000 (150,000 x $4) Cr Ordinary share applicants account $600,000 2 Allotment of shares to share applicants: ( 向申請人分配股份 ) Dr Ordinary share applicants account $400,000 Cr Ordinary share capital account $400,000 (100,000 x $4) 3 Refund of excess application monies: ( 退還超額申請款項 ) Dr Ordinary share applicants account $200,000 (50,000 x $4) Cr Bank account $200,000 B Shares issued at a premium ( 股份按溢價發行 ) On 1 December 2010, JJ Ltd announced a public offering of 100,000 of $2 each ordinary shares at $3. On 10 December 2010, applications together with application monies were received for 150,000 shares. The shares were allotted to the applicants two days later and the excess application monies were refunded on the same day. 1 Receipt of application monies: ( 收取申請認購股款 ) Dr Bank account $450,000 (150,000 x 3) Cr Ordinary share applicants account $450,000 2 Allotment of shares to share applicants: ( 向申請人分配股份 ) Dr Ordinary share applicants account $300,000 Cr Ordinary share capital account $200,000 (100,000 x $2) Cr Share premium account $100,000 (100,000 x $1) 3 Refund of excess application monies: ( 退還超額申請款項 ) Dr Ordinary share applicants account $150,000 (50,000 x $3) Cr Bank account $150,000 14.4.2 Accounting entries for the issue of debentures ( 發行債券的會計分錄 ) BAFS Ltd announced on 1 March 2011 that it would issue $100,000 5% debentures at par. On 20 March 2011, applications were received for $150,000 debentures. Allotments were made on 1 Apr 2011, and the excess application monies were refunded on the same day. 1 Receipt of application monies: ( 收取申請認購股款 ) Dr Bank account $150,000 Cr Debenture applicants account $150,000 2 Allotment of debentures to debenture applicants: ( 向申請人分配債券 ) Dr Debenture applicants account $100,000 Cr 5% debentures account $100,000 3 Refund of excess application monies: ( 退還超額申請款項 ) Dr Debenture applicants account $50,000 Cr Bank account $50,000 4 Payment of Debenture interest: ( 支付債券利息 ) Dr Debenture interest $60,000 Cr Bank account $50,000 23

Longman (Question Bank, 19) (Issue of shares and debentures) The following information was extracted from the books of Dawn Ltd as at 31 December 2015, the year-end date: Issued capital 5,000,000 ordinary shares $7,500,000 Share premium $1,250,000 In January 2016, the company s board of directors decided to raise funds for an expansion project through the issue of shares and debentures. This would be the second share issue of the company. Information on the share and debentures issues was as follows: (i) One million ordinary shares were to be issued at the same price as the first issue. All sums were payable in full on application. On 31 January 2016, application monies were received for 1,400,000 shares. Shares were allotted to applicants on a pro-rata basis on 5 February 2016. Excess application monies were refunded on 8 February 2016. (ii) Four hundred thousand dollars 8% 10-year debentures were to be issued at par, payable in full on application. Applications for that amount were received on 29 February 2016 and the debentures were issued on 1 April 2016. Debenture interest is payable on 31 March and 30 September of each year. Required: Prepare the necessary journal entries for the year ended 31 December 2016. (Narrations are not required.) The Journal Date Details Dr Cr 2016 Jan 31 Bank {1,400,000 [($7,500,000 + $1,250,000) 5,000,000]} 2,450,000 Ordinary share applicants 2,450,000 Feb 5 Ordinary share applicants 1,750,000 Ordinary share capital [1,000,000 ($7,500,000 5,000,000)] 1,500,000 Share premium [1,000,000 ($1,250,000 5,000,000)] 250,000 8 Ordinary share applicants ($2,450,000 $1,500,000 $250,000) 700,000 Bank 700,000 Feb 29 Bank 400,000 Debenture applicants 400,000 Apr 1 Debenture applicants 400,000 8% debentures 400,000 Sept 30 Debenture interest ($400,000 8% 6 / 12 ) 16,000 Bank 16,000 Dec 31 Debenture interest ($400,000 8% 3 / 12 ) 8,000 Accrued debenture interest 8,000 24

Chapter 15 Financial Statements for Limited Companies Income Statement for the year ended 31 March 2010 Sales 410,890 Less Cost of goods sold: Opening inventories 64,320 Add Purchases 118,500 182,820 Less Closing Inventories (58,770) (124,050) Gross profit 286,840 Add Other revenues: Bank interest received 2,800 289,640 Less Expenses: Wages and salaries 76,530 Rent and rates 83,580 Directors remuneration 12,000 Auditors remuneration 5,000 Motor expenses (distribution) 10,780 Sales commissions 7,890 Debenture interest ($80,000 x 6%) 4,800 Bad debts 3,780 Depreciation: Office equipment ($300,000 x 10%) 30,000 Depreciation: Delivery vans ($120,000 - $40,000) x 30% 24,000 (258,360) Net profit 31,280 Less Profit tax (6,240) Profit after tax 25,040 Add Retained profits brought forward 42,000 67,040 Less Appropriations: Transfer to general reserve 10,000 Ordinary share dividend ($200,000 x 0.05) 10,000 (20,000) Retained profits carried forward 47,040 1. The directors may be entitled to remuneration. Directors remuneration would be charged as an expense ( 董事酬金會被視作企業的費用 ). 2. The auditor s remuneration would be charged as an expense ( 核數師酬金會被視作企業的費用 ). 3. Debenture interest would be charged as an expense ( 債券利息會被視作企業的費用 ). 4. Part of the profit may be distributed as dividends to the shareholders of the company. The rest would be transferred to reserves or carried forward to the following year as retained profits ( 企業可能會把部分利潤撥作股息向股東分派 ). 5. Firms are required to pay profits tax and only limited companies are required to disclose this information in their published financial statements ( 有限公司必須要在其公開發表的財務報表內披露有關利得稅的資料 ). 25

Statement of Financial Position as at 31 March 2010 $ ASSETS Non-current assets Property, plant and equipment 246,000 Long-term investments 100,000 346,000 Current assets Inventories 58,770 Accounts receivable 38,470 Bank 16,750 113,990 Total assets 459,990 EQUITY AND LIABILITIES Equity Share capital 200,000 Share premium 12,000 General reserve 60,000 Retained profits 47,040 Proposed dividend 10,000 329,040 Non-current liabilities 6% debentures 80,000 Current liabilities Trade payables 42,310 Accrued expenses 2,400 Tax payable 6,240 50,950 Total liabilities 130,950 Total equity and liabilities 459,990 1 Equity ( 權益 ) refers to the share capital ( 股本 ) and reserves ( 儲備 ). 2 Reserves = Share premium + General reserve + Retained profits after appropriations + Proposed dividend. 3 Proposed dividend ( 擬派股息 ) needs to be approved ( 通過 ) at the annual general meeting ( 股東周年大會 ). According to HKAS (Revised), dividends proposed after the reporting period ( 報告期後建議派發的股息 ) should not be recognized in the amount ( 不應在帳目中確認 ) but should be disclosed in the notes to the financial statements. 26

HKDSE (2015, 8) (Limited Company) Before the preparation of the income statement, Nancy Company Limited has drafted the trial balance as at 31 December 2014 as follows: Dr Cr Purchases and sales 890,000 1,380,000 Ordinary shares of $5 each, fully paid 1,200,000 Accumulated depreciation office equipment, 1 January 2014 340,000 Trade receivables and trade payables 321,900 247,800 Retained profits, 1 January 2014 210,000 6% debentures 150,000 Cash at bank 42,000 Administrative expenses 345,000 Inventory, 1 January 2014 156,000 Office equipment 1,570,000 Selling and distribution expenses 286,900 3,569,800 3,569,800 Additional information: (i) It is the company s policy to depreciate its non-current assets on a straight-line basis at an annual rate of 10%. Depreciation expenses and loss on disposal are classified as administrative expenses. (ii) On 1 October 2014, Nancy Company Limited traded in a piece of used office equipment with a cost of $100,000 for a new model. The trade-in value was agreed at $22,000. The old office equipment had an accumulated depreciation of $52,500 on 1 January 2014. No accounting record had been made for the above arrangement. In respect of this trade-in, the company was required to pay $140,000 for the new office equipment, $5000 for its delivery, $1000 for the insurance during its delivery and $3000 to train staff to operate the new office equipment. All these expenditure had been treated as administrative expenses for 2014. (iii) On 1 July 2014, $150,000 6% debentures were issued, interest being payable half-yearly on 1 January and 1 July. (iv) In December 2014, goods invoiced of $30,000 were sent to a customer on a sale-or-return basis. These had been recorded as credit sales for the year. As at 31 December 2014, 75% of these goods were accepted by the customer. The remaining 25% had been included in the closing inventory at cost. (v) An invoice for selling expenses of $2000 was received but not yet recorded in the books. (vi) Inventory as at 31 December 2014 had a cost of $290,000. 20% of the inventory was slightly damaged and had a net realizable value of $49,980. (vii) On 31 December 2014, the board of directors resolved to transfer $100,000 to general reserve. REQUIRED: (a) Prepare a statement to calculate the cost of the new office equipment in (ii) above. (b) (c) Prepare for Nancy Company Limited the income statement for the year ended 31 December 2014 and the statement of financial position as at that date. Explain, with a relevant accounting principle or concept, the accounting treatment of (vi) above. 27

(a) Statement showing the calculation of the cost of the new office equipment $ Payment for cost 140,000 Trade-in value of the old office equipment 22,000 Delivery charges 5,000 Insurance fee on transportation 1,000 Total cost of the new office equipment 168,000 (b) Nancy Company Limited Income statement for the year ended 31 December 2014 Sales (1,380,000 $30,000 x 25%) 1,372,500 Less: Cost of goods sold Opening inventory 156,000 Add: Purchases 890,000 Less: Closing inventory ($290,000 x 80% + $49,980) (281,980) 764,020 Gross profit 608,480 Less: Expenses Administrative expenses (W1) 375,700 Selling and distribution expenses (286,900 + 2,000) 288,900 Finance cost (150,000 x 6% x 1/2) 4,500 669,100 Net loss (60,620) Add Retained profits brought forward 210,000 149,380 Less Appropriations: Transfer to general reserve (100,000) Retained profits carried forward 49,380 W1: Journal Debit Credit Accumulated depreciation office equipment [$52,500 + $100,000 x 10% x 9/12] 60,000 Office equipment trade-in allowance 22,000 Profit and loss Loss on disposal 18,000 Office equipment 100,000 Office equipment (140,000 + 5,000 + 1,000) 146,000 Bank 146,000 Loss on disposal = 18,000 Depreciation of trade-in office equipment = 100,000 x 10% x 9/12 = 7500 Depreciation of new office equipment = 168,000 x 10% x 3/12 = 4,200 Depreciation of remaining office equipment = (1,570,000 100,000) x 10% = 147,000 Cost of new office equipment = 140,000 + 5,000 + 1,000 = 146,000 Administrative expenses = 345,000 + 18,000 + 4,200 + 7,500 + 147,000 146,000 = 375,700 28

Nancy Company Limited Statement of financial position as at 31 December 2014 Non-current Assets Equipment (1,570,000 $100,000 + 168,000) 1,638,000 Less: Accumulated depreciation (W2) 438,700 1,199,300 Current Assets Inventory ($290,000 x 80% + $49,980) 281,980 Trade receivables (321,900 30,000 x 25%) 314,400 596,380 Less: Current Liabilities Trade payables 247,800 Accrued finance cost 4,500 Accrued selling expenses 2,000 Bank overdraft 42,000 296,300 Net current assets 300,080 1,499,380 Less: Non-current Liabilities 6% debentures (150,000) 1,349,380 Financed by: Capital and reserves Ordinary shares of $5 each, fully paid 1,200,000 General reserve 100,000 Retained profits 49,380 1,349,380 W2: Accumulated depreciation = (340,000 52,500) + 1,470,000 x 10% + 168,000 x 10% x 3/12 = 438,700 (c) Prudence concept should be applied. It means that when choosing among accounting alternatives, the best choice is one that is least likely to overstate assets and profits. The company should adopt the lower of cost or net realizable value in the valuation of inventory. The loss of the damaged inventory $8020 ($58,000 $49,980) should be recognized in the income statement for the year ended 31 December 2014. 29

Chapter 16 Financial analysis ( 財務報表分析 ) HKCEE (2004, 2) (A) Selected financial data for Vera Limited is presented below: Profit and Loss Account Data for the year ended 31 March 2004 $ Sales 248,600 Returns inwards 15,200 Cost of goods sold 155,750 Operating expenses 43,390 Net profit 34,260 Balance Sheet Data as at March 2003 2004 Furniture and fixtures (net) 18,420 Office equipment (net) 32,480 Stock 28,750 26,400 Trade debtors 29,260 30,340 Bank 660 108,300 Ordinary share capital 50,000 Share premium 12,890 Retained profits 15,500 Trade creditors 26,900 Accruals 3,010 108,300 You are required to: Calculate (to two decimal places) for Vera Limited the following ratios for the year ended 31 March 2004: (a) Acid test ratio (b) Stock turnover rate (c) Debtors collection period (in months) (d) Gross profit ratio (e) Return on capital employed (B) (a) Acid test ratio = Current assets Stock / Current liabilities (b) = (30,340 + 660) / (26,900 + 3,010) = 1.04 : 1 Stock turnover rate = Cost of goods sold / Average stock = 155,750 / (28,750 + 26,400) 2 = 5.65 times (c) Debtors collection period (in months) = (Average Debtors / Net credit sales) x 12 (d) (e) Gross profit ratio = Gross profit / Net sales = [(29,260 + 30,340) 2 / (248,600 15,200)] x 12 = 1.53 months = (248,600 15,200 155,750) / (248,600 15,200) = 33.27% Return on capital employed = Net profit / Capital employed = 34,260 / (50,000 + 12,890 + 15,500) = 43.70% 30