2020 POA O Level Answer 7087

2020 O Level POA Answers 7087

Paper 1 :

ai) Profits not distributed to the shareholders and retained in the business for future use. It is carried forward to the next accounting period.

ii) Accumulation of profits and losses that has not been distributed to shareholders. 

b) 

  1. The company issued new shares capital during the year. 
  2. Profit and loss during the year
  3. Declaration of dividends 

c)

Statement of Financial Position as at 30 June 2020 (extract)

Shareholders’ Equity$$$
Issued share capital, 500 000 ordinary shares (600000 + 1.5×100000)750 000
Retained Earnings (225 000+175 000-(0.1×700000)330 000
Total equity1 080 000

d)

1. Banks

2. Government

Etc; customers, employees, suppliers

a) Ensure arithmetical accuracy in recording and facilitate the preparation of financial statements. 

b) A balanced trial balance is not an absolute proof of accuracy of transactions recorded in the ledger accounts. There are some errors, which do not affect the balancing of trial balance, are not revealed by the trial balance. 

c) $54 and understated

d) Integrity. To be straight-forward and honest in all business and professional dealings. 

e) Going Concern concept

ai) Motor vehicle that was bought at $24 000 was sold on credit.

ii) $11 712 is the accumulated depreciation of the sold vehicle.

iii) Speedy cars purchased the vehicle for $10 800 on credit.

iv) Loss on sale of non-current asset of $1488 was transferred to income summary. 

bi) $1500 overstated

ii) $1500 overstated

ai) 

Xin

Inventory account

DateParticularsDr ($)+Cr ($)-Balance
2020
Sep 2Trade Payables – Ray44 70044 700 Dr
10Cost of sales28 00016 700 Dr
22Cash at bank22 00038 700 Dr
29Cost of sales27 600`11 100 Dr
Oct 1Balance b/d11 100 Dr

ii)

Xin

Sales Revenue account

DateParticularsDr ($)+Cr ($)-Balance
2020
Sep 10Trade receivables – Philippa39 80039 800 Cr
29Cash in hand42 00081 800 Cr
Oct 1Balance b/d81 800 Cr

b) Prudence concept. Prudence concept states that a business should not overstate assets, and in this case, inventory.

c) Xin’s rate of trade receivables turnover has improved from 9.27 times in 2019 to 11.41 times in 2020. This indicates that Xin has been managing her trade receivables efficiently over the years. Gemma’s rate of trade receivables turnover has improved from 6.35 times in 2019 to 8.81 times in 2020. This indicates that Gemma has been managing her trade receivables efficiently over the years. Therefore, both Xin and Gemma rate of trade receivables have improved.

Paper 2 :

XY Pte Limited

Statement of Financial Performance for the year ended 31 July 2020

$$
Sales revenue325 000
Less: sales returns(2 400)
Net sales revenue322 600
Less: cost of sales(94 300)
Gross Profit228 300
Add: Other income
Rent received (1 000 + 500)1 500
Less: Expenses
Wages and salaries (78 960 + 560)79 520
General expenses (39 700 – 350)39 350
Equipment repairs (5 600 + 3 000)8 600
Depreciation on equipment (25% x (196 000 – 3 000))48 250
Depreciation on motor vehicles (20% x (84 000 – 30 240))10 752
Impairment loss on trade receivables (4% x 20 000 – 600)200(186 672)
Profit for the year43 128

XY Pte Limited

Statement of financial position as at 31 July 2020

CostAccumulated depreciationNet book value
Assets$$$
Non-current assetsCostAccumulated depreciationNet book value
Equipment(196 000 – 3 000)193 000(48 250 + 98 000)146 25046 750
Motor vehicles84 000(10 752 + 30 240)40 99243 008
Total non-current assets277 000187 24289758
Current assets
Trade receivables20 000
Less: Allowance for Impairmentof trade receivables (4% x 20 000)(800)19 200
Inventory41 320
Cash at bank24 300
Rent receivable500
Prepaid general expense35085 670
Total assets175 428
Equity and Liabilities
Shareholders’ equity
Issued share capital, 100 000 ordinary shares100 000
Retained earnings (18 260 + 43 128 – (0.12 x 100 000))49 388149 388
Non-current liability
Long term borrowing
Current liabilities
Trade payables13 480
Wages and salaries payable560
Dividends payable (0.12 x 100 000)12 00026 040
Total equity and liabilities175 428

ai)

Utilities expense

DateParticularsDr ($)+Cr ($)-Balance
2019
Aug 1Balance b/d682 Cr
2020
Jul 31Cash at bank8 5007 818 Dr
Prepaid utilities2847 534 Dr
Income summary7 534

Utilities expense for the year ended 31 July 2020 = $7 534

aii)

Commission income

DateParticularsDr ($)-Cr ($)+Balance
2019
Aug 1Balance b/d500 Dr
2020
Jul 31Cash at bank9 0008 500 Cr
Commission receivable8009 300 Cr
Income summary9 300

Commission income for the year ended 31 July 2020 = $9 300

b) Prudence concept. A business should not overstate profits and revenue and should not understate expenses.

c) Segregation of duties and custody of cash. 

d) Bank charges

a)

 Liquidity is the ability of a business to convert current assets into cash to repay its current liabilities. 

b) 

30 Sept 2019 30 Sept 2020 
Current ratio87600/30750= 2.85 (2d.p.) 102750/54345= 1.89 (2d.p.) 

c) Evaluate the trend in liquidity of the business over the three years ended 30 September 2018, 2019 and 2020. Use the given information and your answer to (b). 

Kim’s business has a declining trend of working capital from $57000 in 2018 to $56850 in 2019 and further to $48405 in 2020. Kim’s business has a worsening current ratio of 3.62 in 2018 to 2.85 in 2019 to 1.89 in 2020. It is on a declining trend, and in the recent year 2020, its current ratio of 1.89 falls below the general benchmark of 2. This means that Kim’s business has insufficient current assets to repay its immediate debts. 

The quick ratio has worsened from 1.84 in 2018 to 1.42 in 2019 and further to 0.79 in 2020. This shows a declining trend and the most recent quick ratio in 2020 of 0.79 is below the general benchmark of 1, indicating that the business has insufficient assets to pay for its immediate debts. 

The worsening of liquidity could be due to the worsening of cash at bank balance $13125 in 2018 to $8100 in 2019 and a bank overdraft balance of $1050 in 2020. There is also a high level of inventory holdings of $38625 in 2018 to $43800 in 2019 and further to $59850 in 2020. In addition, the business is owing its trade payables more, from $18000 in 2018 to $25950 in 2019 and further to $27750 in 2020. The above ratios indicate that liquidity has worsened for Kim’s business from 2018 to 2020. 

d) 

Profit is only for profitability ratios and not liquidity ratios. Liquidity measures the ability to convert current assets into cash to repay its current liabilities, which does not use the profit of the year to calculate. Therefore, liquidity would change even though profit is the same. 

e) Gross profit margin.

a) Lim should agree to make sales on credit with Jennifer. Firstly, Jennifer operates her business overseas. This will attract more foreigners to purchase the items and his reputation in other countries will be better. This will attract more sales and his sales revenue would increase. Secondly, even though Jennifer started her business nine months ago, as a successful business, she expects to double her sales revenue within one year. This allows Lim to trust Jennifer more as since she has sales revenue being doubled, she will not pay him late. Thirdly, Jennifer is believed to be a reliable and trustworthy customer. She can provide details from her two current suppliers who are willing to give a reference. This means that she is a trustable and reliable customer that Lim can sell his inventory to. Therefore, Lim should agree to make sales on credit with Jennifer.

b)

Journal

DateParticularsDr ($)Cr ($)
2020
Sep 30Allowance for impairment of trade receivable (800 – 200 – 250)350
    Trade receivable – Tan (800 – 200 – 250)350
Being balance on Tan’s account was written off in full

c) In accordance with the prudence theory, where debts are likely to be uncollectible, business should deduct the allowance from impairment of trade receivables to reflex the amount that is collectible to prevent overstate of assets. 

d) Prudence concept. 

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