Manual of business accounting 2e by frank wood

Question 3-2AProfit and Loss Account for the year ended 31 December 20X7 Head Office Branch Combined In Head Office’s books Branch Current Account... 3-5A con’tTrading and Profit and Los

Question 1-2A

(a) Kam’s Books

Bills Payable

“ 21 T Victor Ltd: Bill dishonoured 2,900 “ 21 T Victor Ltd 2,900

Apr 21 P Kam: Dishonoured bill 2,900 “ 28 P Kam: Noting charges 10

Business accounting 2

1-2A con’t

P Kam

Apr 21 Bank: Dishonoured bill 2,900

Bills Receivable

Note: It is assumed that the $3 expenses are chargeable to Tong

Question 1-5A

X’s books

Y

Z

Question 2-2A

(a) Per text

Sale is a sale of goods direct to a customer who will have to pay for the goods, either immediately or at afuture date

Consignment is where goods are sent to an agent for him to sell on behalf of the consignor

Bank: Delivery expenses 100 Unsold inventory at valuation

(a)(i) Books of Good Win Limited

Goods sent on consignment account

2-4A con’t

Oct 1 Goods sent on consignment 200,000 Jan 1 Bank:

Sep 30 Advent Company:

Add Attributable cost per unit

Carriage, freight and insurance costs paid by Good Win Limited ($5,000/2,000) 2.50

(b) (i) Consignment means goods sold through an agent who takes on the responsibility to sell goods, collect

debts and store goods on behalf of the owner (i.e consignor) In return, the agent earns commission.Consignment of goods to an agent (i.e consignee) does not constitute a sale by the consignor, merely atransfer of location of the goods concerned Goods on consignment never belongs to the consignee,they are owned by the consignor until sold

(ii) Goods on sale or return means goods transferred from the supplier to the purchaser; they belong to thesupplier until they are sold In other words, the purchaser can return any unsold goods to the supplier

at their discretion This means that the unsold goods do not belong to the purchaser but to the supplier.Therefore, unsold goods kept by the purchaser should not be included in his closing stock

(c) In a consignment sale, the consignor usually bears the risk of bad debts However, if both the consignor andthe consignee agree, the consignor can shift the bad debt risk to the consignee by paying extra commission

to the consignee This extra commission is known as del credere commission.

Question 3-2A

Profit and Loss Account for the year ended 31 December 20X7

Head Office Branch Combined

In Head Office’s books

Branch Current Account

from branch closing stock ($8,000 × 1

4) 2,000 Profit and loss (Head Office)from stock-in-transit ($6,000 × 1

Question 3-5A

Stock deficiency to branch adjustment 6

(iii) Branch Stock Adjustment (Profit loading)

3-5A con’t

Trading and Profit and Loss Account for the year ended 31 March 20X6

(c) See text, but merits mainly concern tight control as HO can see what profits the branch ought to be making,

also saves branch staff having to keep full accounting records

Demerits depend on whether branch staff are given room for initiative within the above system, or else the

HO stupidly lets the system strangle all initiative

Question 3-7A

LRTrading and Profit and Loss Account for the year ended 31 December 20X9

(a) Head Office (b) Branch

Balance Sheet as at 31 December 20X9

Cost of goods to branch: 100

Stock shortage at cost: 100

2,664

Question 3-9A

Trading and Profit and Loss Account for the year ended 31 December 20X9

Increase in provision for profit

included in branch stock (48 ×1

6) − 5 + (60 ×1

Less Current liabilities

Branch Current Account

Income Statement for the year ended 31 December 20X9

Head Office Branch office Company

Less Cost of sales

3-11A con’t

Balance Sheet as at 31 December 20X9

Head Office Branch Office Company

Capital and reserves

Working 3: Head office income statement

4-2A con’t

CD & Co Ltd

12 × $24,000 800

JY1 20% × 8

12 × $18,000 2,400JY2 20% × $24,000 4,800

Sept 20 Cash to settle 6,000 — Sept 20 Profit and loss:

Balance c/d — 8,000 Dec 31 Profit and loss:

Question 4-7A

Object LtdTrading and Profit and Loss Account for the year ended 31 August 20X6

Balance Sheet as at 31 August 20X6

Current assets

Less Provision for unrealised profit (W3) (99,360) 124,200

Capital and reserves

102,408

Investment Account — SHK Properties

(b) List of listed investments at 30 September 20X8

Name of security Quantity Unit Cost Cost Unit Price Market Value

at 30 Sep 20X8 at 30 Sep 20X8 in value of investments

Question 8-4A

(Dates omitted)

Bank refunds (75,000 × $0.65) 48,750 Bank (200,000 × $0.65) 130,000

application monies (8,000 × $0.75) 6,000 Cash: Balance due on allotment 13,500Share capital: Due on application

Share Premium

$Application and allotment 22,500

Share Capital

Being the receipt of application monies for 6,000,000 shares.

Jan 15 Application and allotment (1,000,000 × $0.60) 600,000

Being refund of the application monies to completely unsuccessful

applicants

Being the receipt of the balance of allotment monies after deducting

the excess application monies received

(4,000,000 × $0.20 − 1,000,000 × $0.60)

Mar 1 Application and allotment (4,000,000 × $0.80) 3,200,000

Being the posting of application and allotment monies to ordinary

share capital and share premium respectively

Being receipt of first and final call with the exception of one

shareholder holding 30,000 shares who failed to pay when it was due

Being the posting of the first and final call monies to ordinary share

June 6 Forfeited shares ($15,000 + $9,000) 24,000

Ordinary share capital (30,000 × ($0.60 − $0.50 + $0.20 + $0.20)) 15,000Share premium ((($0.60 + $0.20 + $0.20 + $0.30) − $1) × 30,000) 9,000Being the posting of the relevant amount to the ordinary share capital

and share premium (profit on re-issue of forfeited shares)

(b) Advantages:

• No fixed annual charges (dividends) are payable

• Ordinary shares do not have a maturity date for repayment

• It reduces the gearing level of the company

“ 31 Profit and loss 6,960.36

9–2A con’t

(d) Profit and Loss Account for the year ended 31 December

$20X3 Debenture redemption reserve 6,960.36

20X4 Debenture redemption reserve 6,960.36

20X5 Debenture redemption reserve 6,960.36

20X6 Debenture redemption reserve 6,960.36

Question 9-3A

Cash received from applicants

Preference shares allotted

Part of purchase price of shares not covered by new issue, to comply with Companies

Ordinance

Shares being purchased

Payment made for share purchase

(b) Dr Cr

Shares being purchased

Premium on purchase of shares not previously issued at premium

Transfer because shares purchased out of distributable profits

Shares to be purchased

Cash paid on purchase

Transfer per Companies Ordinance

Cash received from applicants

Preference shares allotted

Shares to be purchased

Payment made to purchase shares

(e) Dr Cr

Cash received from applicants

Preference shares allotted

Shares being purchased

Amount of share premium account used for redemption

Excess of premium payable over amount of share premium account usable for the purpose

Amount payable on purchase

(D2) 1,200(E2) 1,800

Question 9–6A

Application monies received

Oversubscriptions refunded

Amount due on allotment ordinary shares

First and final call made

Amount paid on call

Amounts not received cancelled

Forfeited shares now reissued

Monies received on issue

(m) Application and allotment — redeemable shares 800,000

Redeemable shares allotted

$ $

Shares to be redeemed at premium $0.4

Monies paid on redemption

400,000 March Hares shares of $0.25 purchased, payment being 200,000

Issue of 7% debentures at 5% discount

9–8A con’t

Being receipt from issuing of shares to fund the debenture redemption

Being transfer from profit and loss to debenture redemption reserve

Being redemption of debenture at premium was funded by profit and

loss and share premium

Being receipt of application monies

Being receipt of allotment monies

Being transfer to ordinary share capital

Being first call on shares

Being receipt of call monies and balances transferred

Being second call on shares

Being receipt of call monies

Being the reissue of ordinary shares

Question 9–12A

(a)

Debenture Redemption Reserve Fund (DRRF)

Jul 1 Debenture redemption [G] 1,000

Dec 31 Debenture redemption [M] 400,000

Dec 31 Bank [J] ($400,000 × 8% ×

1

Jul 1 Sinking fund investment [D] 98,000 Jul 1 Debenture redemption [F] 99,000

Dec 31 Sinking fund investment [K] 500,000 Dec 31 Debenture interest [J] 16,000

Discharge of purchase consideration by issue of 120,000 ordinary share $1 each

and a cash payment of $25,000

The premises sold by Hubble had never been depreciated The ‘profit’ of $20,000 was not, therefore, an

adjustment of depreciation, but a capital profit Capital profits cannot be distributed as cash dividends and

therefore the ‘profit’ of $20,000 should be taken to a capital reserve

Question 10-5A

VU Limited

Pre-incorporation Post-incorporation 1.4.20X9 to 30.6.20X9 1.7.20X9 to 31.3.20Y0

Question 10-6A

Rowlock LtdTrading and Profit and Loss Account for the year ended 31 May 20X9

Balance Sheet as at 31 May 20X9

Question 10-8A

(a) The reasons for the conversion of a partnership into a limited company may be:

• to limit the liabilities of the partners up to the amount of capital issued; or

• to allow flexibility in raising capital, such as the issue of ordinary shares to potential investors, the issue

of preference shares, the issue of convertible bonds, the issue of debentures etc.; or

• to permit over 20 investors to invest in the business

Issued share capital

1,000,000 Ordinary shares of $1 each, fully paid (Note 3) 1,000,000

Less Net assets purchased

Purchase consideration funded by:

Issue of 1,000,000 ordinary shares for $2 (par $1 + premium $1) 2,000,000

Note 4 $

Project Valuation Rationale

A Nil Pure or applied research is regarded as part of the operating cost required to

B Nil maintain an enterprise’s business and its competitive position It is not expected for

the enterprise to benefit in any particular period Due to this characteristic, researchcosts should be recognised as an expense in the period in which they are incurredand should not be recognised as an asset in a subsequent period

C $150,000 The nature of development activities is such that the enterprise can determine the

probability of receiving future economic benefits Therefore development costs arerecognised as an asset when they meet criteria which indicate that it is probable thatthe costs will give rise to future economic benefits

General reserves ($4,000,000 − $750,000 goodwill written off) 3,250,000

9,250,000

Balance Sheet (immediately after the purchase of Queen Limited)

be made of the likely pattern of future tax liabilities

If these financial plans are not fully developed or subject to a high degree of uncertainty, a prudent viewshould be taken However, no minimum period of years is specified by the standard and in practicethere may well be increasing uncertainty beyond say the next two years In such cases, the procedure is

to look for a pattern of originating or timing differences e.g plans for continuing expansion, cyclicalcapital expenditure

Given the uncertainty, the plans need to be reviewed each year to assess how closely the actual capitalflows have followed the plans for the year, e.g a material difference might cause future years to besubstantially revised: to take the current liquidity position into account, e.g a growth in output might

have created a larger than expected need for working capital which might impact on planned futurecapital expenditure; and to take external changes into account, e.g closures or restriction of capitalexpenditure in response to recession with a fall in demand or credit squeeze with a fall in the availability

of finance

Debit balances

Deferred tax net debit balances should not be carried forward as assets, except to the extent that theyare expected to be recoverable without replacement by equivalent debit balances

(b) (i) Depreciation allowance timing differences:

The cost of the offices does not qualify for tax allowances and the depreciation of $1.5m on the officesneeds to be deducted from the total depreciation charge for deferred tax purposes

The relevant amounts are:

The net cumulative timing differences need to be calculated for the future periods as follows:

King Pacific Ltd should provide deferred tax on the maximum potential liability of $6m arising in 20X6

at 35 per cent i.e $2.1m

The balance sheet amount of $2.1m will be included under the heading ‘Taxation, including deferredtax’ with a note as follows:

Deferred taxation accounted for in the balance sheet.

Timing differences on depreciation allowances and depreciation = $2.1m

The $2.1m is based on a partial provision approach In addition there will be a note of the amount notprovided for the full potential credit provision The full provision would be 35 per cent of $8m

[depreciation allowances of $35.4m − aggregate depreciation ($28.9m (W1) less depreciation on theoffices $1.5m) $27.4m]

(W1)

Aggregate depreciation at 31 December 20X2

Offices Plant Equipment Total

Deferred taxation not accounted for in the balance sheet

Depreciation allowances utilised in excess of depreciation charged = ($2.8m – $2.1m) $0.7m

11-3A con’t

(ii) Deferred asset arising from the taxable losses:

The loss of $28m gives rise to a deferred asset of $9.8m

There is then the question of whether this can be debited to the deferred tax account and recognised inthe balance sheet This requires an assessment of the recoverability of the tax

Information will be required that (a) there is a history of profitability with any previous losses havingbeen fully recovered and (b) there must be assurance, beyond a reasonable doubt, that future taxableprofits will be sufficient to offset the loss during the period of time permitted for such carry forward.There is information given in the question that there is a history of profitability There is no informationgiven as to future trading profits/losses A deferred asset cannot be created until this estimate of futuretrading results has been established

If the company satisfies the recoverability test, the deferred tax account will be debited with the $9.8marising from the losses resulting in a debit balance of $7.7m which will be classified under ‘prepaymentsand accrued income’ in the balance sheet

(c) (i) Revaluation of assets, which it is not intended to sell, resulting in an increase in the balance sheet

amount The balance sheet has benefited from the increased value and on the matching principle anypotential liability should be disclosed if not provided

(ii) Earnings retained overseas If further taxation would be payable on the distribution of these earningsthen the potential liability, however remote, should be disclosed for a proper evaluation of the assetsand earnings

(d) There are a number of areas in which the application of the HKSSAP could give rise to different amountsbeing calculated for deferred tax although the circumstances might be similar We will comment on twosuch areas, namely, assessment of forecasts and revaluations

Assessment of forecasts

There is the difficulty that any provision is dependent upon an assessment of the accuracy of the forecast andthis depends on the individual making the forecast As a result, consistency of treatment between companies

is unlikely

The treatment of revaluations

The standard is unsatisfactory in that it lacks clarity over the appropriate treatment which means that it is amatter for each individual company as to whether or not to make a provision for a future tax liability

depending on a decision as to the possible sale or scrapping of the fixed assets, e.g it is extremely easy forthe management to revalue but profess an intention not to sell any of the revalued assets thereby avoiding theneed for any provision

Question 13-3A

Workings

Owens LtdCapital Reduction

Debit balance of the profit and loss 85,000 Ordinary shares 270,000