B301 1996 August Examination

PART A (30 marks)

Answer ANY FIVE questions out of six questions in this part. Each question carries 6 marks. Spend about an hour on this part.

Question 1 (6 marks)

What are the rights entitled to each of the following holders?

(a) Ordinary shareholders,

(b) Preference shareholders,

(c) Debenture holders.

Question 2 (6 marks)

(a) What are the standard headings required in a cash flow statement as stated in HKSSAP 15 (Cash flow statements)? What is the objective of these standard headings?

(b) "Analysis of net cash flow from operating activities on the so-called 'direct method' is encouraged but not required (HKSSAP IS, item 6)." What are the accounting treatments where the "indirect method" is adopted in preparing a cash flow statement?

Question 3 (6 marks)

(a) What are timing differences as defined in HKSSAP 12 (Accounting for deferred tax)?

(b) Describe the main sources that give rise to permanent differences.

(c) "Accelerated depreciation allowances are timing differences which arise from the availability of depreciation allowances in tax computations which are in excess of the related depreciation charges in financial statements (HKSSAP 12. Appendix--item 7)." Explain the accounting treatments for the timing differences arising from accelerated depreciation allowances for a company which has a relatively stable or growing investment in depreciable assets.

Question 4 (6 marks)

(a) What is the concept of "prudence" as defined in HKSSAP 1 (Disclosure of accounting policies)?

(b) Discuss how the concept of "prudence" has been adopted in the standard accounting practice for reporting contingency in HKSSAP 8 (Accounting for contingencies)

Question 5 (6 marks)

(a) What are the elements of stock and work in progress as defined in HKSSAP 3 (Stocks and work in progress)?

(b) Briefly describe the standard accounting practice for reporting stocks and work in progress other than long-term contract work in progress.

(c) Briefly describe the standard accounting practice for reporting long-term contract work in progress.

Question 6 (6 marks)

(a) What are "property, plant and equipment" and "useful life" as defined in HKSSAP 17 (Property, plant and equipment)?

(b) Briefly describe the standard accounting practice for recording the depreciation of property, plant and equipment.

PART B (70 marks)

Answer ALL THREE questions in this part. Begin the answer of each question on a new page. Put down the question number on the top of each page in the answer book. Do your rough work on the answer book and cross out your rough work afterwards. You may ask for supplementary answer books if you need them. Spend about 2 hours on this part.

Question 7 (21 marks)

On 1 October 1995. Redone Company Limited recruited a new accountant to upgrade its manual accounting system to a computerised one. However, since the new computerised system was unreliable, it was found that some entries had been omitted while the others had been recorded twice in the books. As a result, the accountant left the company on 31 December 1995.

The trial balance of Redone Company Limited as at 30 September 1995 is given as follows:

The bank statements for the three months to 31 December 1995 show the following Information -

            $'000

Receipts from debtors                                                      13,467

Payments to trade creditors                                             11 ,004

Settlement for accounts payable and accruals                       805

Payments for additions of fixed assets                               1,735

Taxation paid                                                                       268

Cash receipts on increase of share capital                         2,000

Cash received from sale of fixed assets                                 40

Additional information:

i) a stocktake was carried out on 31 December 95 and the closing stocks were $800,000.

ii) manual fixed assets register showed that assets at cost of $295,000 was disposed on 1 October 95. The accumulated depreciation at the time of disposal was $235,000.

iii) trade debtors and trade creditors balances as at 3 1 December 95 were found to be $111,463,000 and $118,826,000 respectively. The debtors balance included an amount of $620,000 which is considered to be bad and needs to be written off.

iv) expense invoices amounting to $1,377,000 incurred during the period were received in December 95 and were paid subsequently after 31 December 95.

v) there is no movement in the amount due to holding company and the deposits and prepayment accounts.

vi) the policy of Redone Company Limited is to amortise goodwill at 20% p.a. on a straight line basis.

vii) fixed assets are to be depreciated at 20% p.a. on a straight line basis

viii) assume that there is no stock as at 30 September 95 and tax provision is not required.

Required: You are required to prepare the following:

a) movements of bank account;

b) debtors ledger account;

C) creditors ledger account;

d) accounts payable and accruals account;

e) fixed assets schedule showing movements of additions and disposals, depreciation and net book value as at 31 December 95, and

f) draft trading and profit and loss account for the three months ended 31 December 1995.

Show all your workings.

Question 8 (23 marks)

Home Appliances Limited has its head office and main store in Mongkok, and a branch store in Kwai Chung All goods are purchased by the head office. Goods are invoiced to the branch at cost plus 20%. The following trial balances were extracted from the books of both the head office and the branch as at 31 March 1995.

Additional information:

1. Closing stocks at 3 1 March 1995 were estimated:

    head office (at cost)             $330,000

    branch (at invoiced price)     $120,000

2. An amount of $240,000 stocks at invoiced price had been dispatched to the branch on 29 March 1995 and recorded in the head office's accounts immediately. These goods had not been received by the branch until 3 April 1995, and their title remained to be of the head office until they were received by the branch.

3. On 31 March 1995, the branch had paid an amount of $55,000 cheques into the bank account of the head office, but this was not received by the head office until 1 April 1995.

Required:

a) Reconcile the branch/head office current accounts, starting from the balances of the head office and the branch respectively, and reconciling to the correct adjusted balance of the accounts.

b) Calculate the additional unrealised profit to be provided in the head office book for the unsold stocks in the branch as at 31 March 1995.

c) Prepare balance sheet as at 31 March 1995 for Home Appliances Limited in three column form (showing balances for head office, branch, and the total for Home Appliances Limited).

Question 9 (26 marks)

The fo1lowing is the capital structure and trading results of Chung's Group Limited:

(a) CAPITAL STRUCTURE

Issued Share Capital as at 31 March 1990:

$7,000,000 in 10% cumulative preference shares of$10

$ 16,000,000 in ordinary shares of $4 par value = 4,000,000 shares

On 1 April 1990, the company issued $8,000,000 10% convertible unsecured loan stock for cash at par. Each $1,000 nominal of the stock will be convertible in 1994/1998 into the number of ordinary shares set out below;

On 31 December 1994         135 shares

On 31 December 1995         130 shares

On 31 December 1996         125 shares

On 31 December 1997         120 shares

On 3 1 December 1998        115 shares

On 31 December 1994, the holders of half of the loan stock had exercised their right of conversion at 135 shares per $1,000 stock and the remaining stock was converted on 31 December 1995 at 130 shares per $1,000 stock. Except these conversions, no other changes in the issued share capital of the company were found.

(b) TRADING RESULTS

Year ended 31 Dec.                             1995          1994 ($'000)

Profit before interest and tax                16,000       14,000

The profits tax rate for the company is 15%.

Required:

According to HKSSAP 5, how should Chung's Group Limited disclose the amounts related to the earnings per share for the year ended 31 December 1995 in the accounts

(Calculate the amounts with detailed workings)?

END OF QUESTION PAPER