2021 GCE O Level POA Paper 2 Solutions

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Update 3pm, 8 Nov: the 7175 Solution is up!
Update 3:50pm, 8 Nov: Workings for 7175 Q1 and Q2 updated with corrections.

7087 GCE O LEVEL PAPER 2 (NEW SYLLABUS)

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Jordan
Statement of financial performance for year ended 31 December 2020 

$$
Advertising Fee revenue (186750-127000 )174,050
Other income:
Commission income1,300
Less: Other expenses
Impairment loss on trade receivables (465-195)270
Depreciation of office equipment (25% x [40,000-10,000])8,500
Depreciation of motor vehicles (107,500
Interest expense (4% x 15,000)600
General expense (12350-950)11,400
Rent expense (22500-750)21,750
Wages and salaries38,500
Printing expense (23460+1800)25,260113,780
Profit for the year61,570
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Jordan
Statement of financial position as at 31 December 2020 

$$$
Non-current assetsCostAcc DepNet book value
Office equipment 85,00025,50059,500
Motor Vehicles40,00017,50022,500
82,000
Current assets
Inventory
Trade receivables23250
Less: Allowance for impairment of trade receivables(195+270)(465)22,785
Prepaid rent expense 750
Cash at bank5670
Total Assets111,205
Equity & Liabilities
Owner’s equity
Capital (27685-19500-950+ 61570)68805
Non-current liabilities
Long-term borrowings15,000
Current liabilities
Trade payables12,300
Printing expense payable 1800
Advertising fee revenue received in advance12700
Interest expense payable 600
28900 
Total equity and liabilities111205
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(a) 

Journal 

Date Particulars Dr Cr 
2021          $$
Mar 3Cost of sales 2100
      Inventory 2100
Trade receivable – Joel (95% x 3000)2850
      Sales revenue           2850
Mar 14Cash at bank 2793
Discount allowed 57
      Trade receivable – Joel2850

(b) The business offers a trade discount to encourage customer loyalty / bulk purchase.

(c) The business offers a cash discount to encourage early / prompt payment.

(d)
-Accountants prepare and provide accounting information to stakeholders of the business for decision making. 

-Accountants set up an accounting information system and become stewards of the business. 

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3. 

a)Tasty CakesFancy Gateaux
(i)Gross profit margin 68,000-44,000 = $24,000(24,000÷68,000) x 100%= 35.29%92,000-53,000 = $39,000(39,000÷92,000) x 100%=42.39%
(ii)Profit margin 24,000-9500=14,500(14500÷68,000)x 100%=21.329%39000-22400=16600(16600÷92000)x100% =18.05%

(b) Fancy gateaux gross profit margin is better than tasty cakes. Fancy is selling goods at a higher price than tasty cakes and fancy can buy cheaper goods. However Tasty cakes had a better profit margin as compared to Fancy gateaux. Tasty cakes is better at managing its operating expenses. Comparing only margins, tasty is more profitable than Fancy. Tastys return on equity is better than fancy, hence, overall tasty is more profitable. 

(c) For investors, the most important criteria is the return on equity. Zander should invest in tasty cakes as it has a higher return on equity than fancy. 20.52-15.34=$5.18. Tasty can earn $5.18 more for every $1 invested. 
(d) Profitability is important to a business to ensure that the business can sustain on its own in the long run without a need for constant capital injection from its owner(s) to stay as a going concern.

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(a) March 31:  Bought a motor vehicle worth $15,000 on credit from Naomi.

 March 31: Owner contributed a motor vehicle worth $9000 into the business 

The last part has been modified in 2021 due to removal of common last topic (CLT): Sale of Non Current Assets:

Original: March 31: Sold motor vehicle costing $20,000 (original).
Modified for CLT: Purchased motor vehicle for $20,000 by cheque

(b)

(i) Capital expenditure is the cost incurred to bring the non-current asset to their intended use,  it provides benefits that last for more than one year and is recorded as a non-current asset.

(ii) Revenue expenditure is the cost incurred to repair and maintain the non-current asset to keep it in working condition. The benefits will be used within one financial year ans is recorded as an expense. 

(c) 

Decision [1]Khalid should buy Machine Alpha.
Evidence [1]It has a larger capacity and is able to pack 10,000 units per week as compared to machine Omega that can only pack 9,000 units per week. 
Explanation [1]The owner is assured of stock availability and is able to meet the demands of the customers without being short of stock.
Evidence [1]It requires one full-time supervisor compared to machine Omega that requires two.
Explanation [1]This allows the business to reduce the cost of salaries which will increase the profitability of the business.
Evidence [1]Machine alpha also has a longer warranty of 5 years while Machine Omega has a warranty of 3 years.
Explanation [1]This allows the business to attract more customers as they are assured of the quality of the product and availability of should they need after-sales support

OR

Decision [1]Khalid should buy Machine Omega.
Evidence [1]It has a cheaper cost price compared to machine Alpha..
Explanation [1]Assuming the number of sales remains the same, the business is able to earn more revenue with a machine Omega as it has a lower cost. 
Evidence [1]Machine omega also has a cheaper annual service cost of $500 compared to $750 for machine Alpha
Explanation [1]This allows the business to invest the money on other things and help to improve the performance of the business.
Evidence [1]Machine omega also has positive feedback from 80% of customers as compared to machine Alpha that is a new machine with no reviews
Explanation [1]This will attract more customers as they are assured of the quality of the machine, which will lead to more profit for the business.

7175 GCE O LEVEL POA PAPER 2 SOLUTIONS

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  Michelle 

                  Income statement for the year ended 30 September 2021 

$$
Sales revenue97,200
Less: Sales returns(3400)
Net sales revenue93,800
Less: Cost of sales(58300-420)57,880
Gross profit35920
Other income
Discount received1400
Less: Other expenses
Impairment loss on trade receivables450
Depreciation of fixtures and fittings(10%x33000)3300
Depreciation of motor vehicles [(24000-10500) x 25%]3375
Interest600
General expense(8110+185)8295
Wages and salaries 15700
Discount allowed 1875
Rent expense (11250-2250)900042595
Loss for the period 5275
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Michelle 

                         Balance sheet as at 30 September 2021 

$$$
Non-current assetsCostAccumulateddepreciationNet book value
Fixtures and fittings330001320019800
Motor Vehicles240001387510125
29925
Current assets
Inventory9750
Trade receivables10820
Less: Allowance for impairment of trade receivables (700-250)(700)
Net trade receivables10120 
Prepaid rent expense 2250
Cash at bank3200
Total Assets55245
Equity & Liabilities
Owner’s equity
Beginning Capital(-5800-420-5275)47615
Less: Loss for the year(5275)
Less: Drawings(6220)36120
Non-current liabilities
Long-term borrowings10000
Current liabilities
Trade payables8340
General expense payable185
Accrued interest expense 6009125
Total equity and liabilities55245
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(a) The value of owner’s equity changes when there’s contribution of assets by its owner, profit and losses in a year and owner’s drawing of resources from the business for personal use.

(b) Profit = Ending capital + drawings – beginning capital.

35,000 = (105,000+16,000+11,000+2250-29000-3250-32000) + Drawings – 55,000

35,000=70,000 + Drawings -55,000
Drawings = 35,000+55,000-70,000
=$20,000

(c) Dr Capital 6100, Cr Drawings 6100
(d) CLT.

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(a)

Journal 

Date Particulars Dr Cr 
2020$$
May Allowance for impairment of trade receivables2100
      Trade receivables – Ami 2100

(b) The business allocates a portion of trade receivables as allowance for impairment of trade receivables as debts that are likely to be uncollectible, this is to ensure that the business does not overstate its assets in accordance to prudence theory.

(c) 

Allowance for impairment of trade receivables account

Date Particulars Dr Cr Balance 
2020      $      $      $
June 1Balance b/d (2100+4200+3520)    9820 Cr
2021
May 31Trade receivables – Ami 21007720  Cr
Trade receivables – Eugene 22005520 Cr
Impairment loss on trade receivable55200

(d) Impairment loss on trade receivables will be recorded as an expense.


(e) Evaluate:
He can evaluate the likelihood based on the fact that he is in the second year of business and has a history of the payment behavior of his customers. He should also do so to follow the prudence concept and avoid overstating assets by recording allowance for impairment on trade receivable should some credit customer be unable to pay in near future.

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(a)

Trade payable – Chang 

Date Particulars Dr Cr Balance 
2021      $      $      $
Feb 8 Inventory 35003500 Cr
Feb 12 Inventory 5003000 Cr
Feb 16Inventory (90% x 6000)54008400 Cr
Feb 21 Cash at bank  (98%x 8400)8232168 Cr
Discount received (2%x 8400)168

(b) Trade discount is given to encourage bulk purchase
Trade discount is given at the point of sale

Cash discount is given to encourage early/prompt payment

Cash discount is given at the point of payment


(c) The financial statement of a trading business includes the sales revenue, sales returns and cost of sales account while a service business does not have a trading account and starts its financial statements with a service fee revenue account. 

(d) The accounting period theory divides the life of a business into equal time periods for financial reporting.

  1. Non current assets are assets owned and controlled by the business and bought for the business use to generate income. It is not meant for resale.

i) Depreciation is the allocation of the cost of non-current asset over its useful life

ii) Accumulated depreciation refers to the total depreciation of a non-current asset to date.

(c) Prudence and matching concept
Note: Consistency concept is not appropriate. This concept is for the use of the same depreciation methods across accounting periods.

(d) Gain or Loss on Sale of NCA:
Net book value of nca = 80%*80%*30,000 = $19,200
Sold for $15,000. Loss on sale of non-current asset = $19,200 – $15,000 = $4,200.

(e) Dr Cash at bank 15,000 Cr SALE OF NON- CURRENT ASSET
Note: It’s not credit Motor Vehicle. See page 54 of MPOA study guide for explanation.

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