Accounting (0452) · May/June 2018 · Question paper 21

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Cambridge International Examinations
Cambridge International General Certificate of Secondary Education

* 9 5 4 9 2 8 7 4 7 8 *

0452/21

ACCOUNTING

May/June 2018

Paper 2

1 hour 45 minutes
Candidates answer on the Question Paper.
No Additional Materials are required.
READ THESE INSTRUCTIONS FIRST
Write your Centre number, candidate number and name on all the work you hand in.
Write in dark blue or black pen.
You may use an HB pencil for any diagrams or graphs.
Do not use staples, paper clips, glue or correction fluid.
DO NOT WRITE IN ANY BARCODES.
Answer all questions.
You may use a calculator.
Where layouts are to be completed, you may not need all the lines for your answer.
The businesses mentioned in this Question Paper are fictitious.
At the end of the examination, fasten all your work securely together.
The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 20 printed pages.
DC (RW) 144910/4
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1

Lydia is a trader. She keeps a full set of accounting records and prepares control accounts at the
end of each month.
REQUIRED
(a) Name the book of prime (original) entry which Lydia would use to obtain the following
information when preparing her control accounts.
Book of prime (original) entry
Returns by credit customers
Bad debts written off
[2]
Lydia was able to provide the following information for the month ended 30 April 2018.
2018
April 1

Amount owing by credit customers
Amount owing to credit suppliers

April 30 Totals for the month
Cash purchases
Credit purchases
Returns to credit suppliers
Returns from credit customers
Cheques received from credit customers
Discount allowed
Discount received
Contra entry
Carriage charged by credit supplier
May 1

Debit balance in purchases ledger
Credit balance in purchases ledger

$
3944
4215
996
4855
113
236
3332
68
95
250
210
100
4237

REQUIRED
(b) Select the relevant figures and prepare the purchases ledger control account for the month of
April 2018.
Insert a figure for cheques paid to credit suppliers.
Balance the account and bring down the balances on 1 May 2018.

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Lydia
Purchases ledger control account
Date

Details

$

Date

Details

$

[9]

(c) Suggest two reasons for the debit balance in the purchases ledger on 1 May 2018.
1

2
[2]

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Lydia is proposing to create and maintain a provision for doubtful debts at 2½% of trade receivables
at the end of each financial year.
REQUIRED
(d) Explain how maintaining a provision for doubtful debts is an example of the application of the
principle of prudence.

[2]
Lydia allows her credit customers a cash discount of 2% if accounts are settled within 30 days.
From 1 June 2018 Lydia is proposing to offer a cash discount of 3% if accounts are settled within
21 days.
REQUIRED
(e) Discuss how this proposal could affect Lydia’s:
(i)

future liquidity

[2]

(ii)

future profit for the year.

[2]
[Total: 19]

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On 1 March 2017 Nabil started a business buying and selling office supplies on credit.
Nabil opened a business bank account on 1 March 2017 with capital, $155 000 and a loan from
AB Loans, $80 000. On the same day he purchased premises, $200 000, fixtures and fittings,
$22 000, and inventory, $5500, paying by cheque.
REQUIRED
(a) Prepare a journal entry to include all the above information to open the books of the business
on 1 March 2017.
A narrative is required.
Nabil
Journal
Date
2017

Details

Debit
$

Credit
$

[5]

(b) Name two uses of the general journal, apart from opening entries.
1
2 [2]

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Despite having little knowledge of book-keeping, Nabil decided to prepare a trial balance at the
end of his financial year on 28 February 2018.
The trial balance he prepared, which contains errors, was as follows.
Debit
$

Revenue
Purchases
Capital
Loan – AB Loans
Premises
Fixtures and fittings
Trade receivables
Trade payables
Bank overdraft
Wages
General expenses
Inventory 1 March 2017
28 February 2018
Difference on trial balance

72 000
200 000
22 000
7 600
3 950
32 300
25 400
5 500
6 100
374 850

Credit
$
119 100
155 000
80 000

6 850

13 900
374 850

The following errors were later discovered.
1

Nabil’s cash drawings, $10 000, had been posted to the wages account.

2

No entry had been made for purchases returns, $150.

3

$140 owed by a credit customer should have been written off as a bad debt.

4

No entry had been made for bank charges, $210.

5

The balance of the petty cash book, $100, had been omitted from the trial balance.

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REQUIRED
(c) Prepare a corrected trial balance at 28 February 2018.
Nabil
Corrected Trial Balance at 28 February 2018
Debit
$

Credit
$

Revenue

Purchases

Capital

Loan – AB Loans

Premises

Fixtures and fittings

Trade receivables

Trade payables

Bank overdraft

Wages

General expenses

Inventory

[13]
[Total: 20]

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3

Masuma owns a furniture store. She maintains a full set of accounting records. Her financial year
ends on 31 March.
Masuma provided the following information at 31 March 2018.
1

On 1 April 2017 Amina, a credit customer, owed $160. On 1 March 2018 she paid 75% of this
and the balance was written off as a bad debt.

2

On 4 January 2018 additional fixtures and fittings, $2000, were purchased on credit from
Office Traders, but this transaction was not recorded.

3

The fixtures and fittings are depreciated at the rate of 20% per annum on the cost of equipment
held at the end of each financial year.

4

On 31 March 2018 the discount columns in the cash book showed the following totals for the
month:
discount column on debit side $55
discount column on credit side $68
These totals had not been transferred to the discount accounts in the ledger.

REQUIRED
(a) Record this information in the following accounts in Masuma’s ledger at 31 March 2018.
Some entries have already been made in the accounts during the year.
Close all the accounts by balancing or by making a transfer to an appropriate account.
Masuma
Amina account
Date
2017

Details

$

Date

Details

$

160

April 1

Balance b/d

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Bad debts account
Date
2018

Details

$

Date

Details

$

135

Feb 28

Total written off

Fixtures and fittings account
Date
2017

Details

$

Date

Details

$

4000

April 1

Balance b/d

Provision for depreciation of fixtures and fittings account
Date

Details

$

Date
2017

April 1

Balance b/d

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Details

$
1600

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Discount allowed account
Date
2018

Details

$

Date

Details

$

3590

Feb 28

Total to date

Discount received account
Date

Details

$

Date
2018

Feb 28

Total to date

Details

$
4130

[12]
The following account appeared in Masuma’s ledger on 31 March 2018.
Disposal of motor vehicle account
Date
2018
Feb 1

Details
Motor vehicles

$
9500

9500

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Date
2018
Feb 1

Mar 31

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Details
Provision for
depreciation of
motor vehicles
M6Vans
Income statement

$

4636
3500
1364
9500

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REQUIRED
(b) Explain each entry in the disposal of motor vehicle account.
Name the account in which the double entry would be made for each item.
State whether that account would be debited or credited.
February 1 Motor vehicles
Explanation

Double entry
February 1 Provision for depreciation of motor vehicles
Explanation

Double entry
February 1 M6Vans
Explanation

Double entry
March 31 Income statement
Explanation

Double entry [8]
[Total: 20]

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Asim has an advertising agency. His financial year ends on 31 January.
He provided the following information on 31 January 2018.
Capital at 1 February 2017
Drawings
Office equipment at valuation at 1 February 2017
Motor vehicle at cost
Provision for depreciation of motor vehicle
Fees received from clients
Wages of assistant
General expenses
Motor expenses
Rates and insurance
Rent received from tenant

$
120 000
8 500
6 180
15 000
5 400
28 350
19 000
1 358
970
2 280
5 600

Additional information
1

At 31 January 2018
$2400 was outstanding from clients for fees.
Motor expenses outstanding amounted to $110.
A provision for doubtful debts of 2% of the amount owed by clients should be created.

2

The rates and insurance paid were for a period of 15 months from 1 February 2017.

3

Part of the premises were let to a tenant on 1 February 2017 at an annual rent of $4800.

4

One quarter of the motor expenses are for Asim’s personal use of the motor vehicle.

5

The motor vehicle is to be depreciated at 20% per annum using the reducing (diminishing)
balance method.

6

The office equipment was valued at $5500 on 31 January 2018.
No office equipment was purchased or sold during the year.

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REQUIRED
(a) Prepare Asim’s income statement for the year ended 31 January 2018.
Asim
Income Statement for the year ended 31 January 2018
$

$

[13]

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(b) State the formula for the calculation of the return on capital employed (ROCE).

[1]
(c) Calculate Asim’s return on capital employed (ROCE) using his capital at 1 February 2017.
The calculation should be correct to two decimal places.

[2]
(d) Suggest two reasons why Asim’s return on capital employed (ROCE) is higher than that of
Naqid who has a similar business.
1

2
[2]
(e) Explain why Asim should consider non-financial factors when comparing his financial
statements with those of Naqid.

[2]
[Total: 20]

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Ravi is a wholesaler. His financial year ends on 31 March. He provided the following information
for the year ended 31 March 2018.
$

Revenue
cash sales
credit sales
Purchases returns
Inventory at 1 April 2017

8 750
34 450
950
2 900

Mark-up

20%

Inventory at 31 March 2018 was 50% greater than that at 1 April 2017.
REQUIRED
(a) Prepare the income statement (trading account section) for the year ended 31 March 2018 to
calculate the purchases for the year.
Ravi
Income Statement (Trading Account section) for the year ended
31 March 2018

[8]
(b) State the formula for the calculation of the rate of inventory turnover (in times).

[1]

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(c) Suggest two reasons why Ravi’s rate of inventory turnover is lower than the average for this
type of business.
1

2
[2]
(d) State the basis on which Ravi should value his inventory.
[1]
(e) Name the accounting principle which Ravi is applying by valuing his inventory on this basis.
[1]
(f)

Complete the table by placing a tick () in the correct column to indicate the effect of Ravi
overvaluing his inventory at 31 March 2018.
The first one has been completed as an example.
Overstated
current assets at 31 March 2018

Understated



cost of sales for the year ended 31 March 2018
gross profit for the year ended 31 March 2018
cost of sales for the year ending 31 March 2019
profit for the year ending 31 March 2019
[4]
Ravi is considering ways to increase his gross profit.
REQUIRED
(g) Complete the table by placing a tick () in the correct column to indicate how each of the
following proposals would affect Ravi’s gross profit.
Increase

Decrease

No effect

Reduce the rate of trade discount
allowed to credit customers
Reduce the rate of cash discount
allowed to credit customers
[2]
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(h) Comment on the possible effects of Ravi’s proposal to increase the mark-up from 20% to
25%.

[2]
[Total: 21]

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6

The financial year of CD Limited ends on 30 April. The following information was provided on
30 April 2018.
Non-current assets (book value)
Inventory
Trade receivables
Bank

$
227 000
29 000
22 000
11 000

$

Ordinary share capital
(300 000 shares of $0.50)
150 000
General reserve 1 May 2017
30 000
Retained earnings 1 May 2017
6 000
Profit for the year ended
30 April 2018
13 000
5% Debentures (repayable 2025) 50 000
Trade and other payables
40 000

REQUIRED
(a) State two differences between debentures and ordinary shares.
1

2

[4]
(b) State how the general reserve has arisen.

[1]
(c) State two reasons why CD Limited retains some profit each year.
1

2
[2]

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(d) Complete the table by placing tick(s) () in the correct column(s) to indicate where each of
the following would be included in the financial statements of CD Limited at 30 April 2018.
Some items may appear in more than one statement.
The first one has been completed as an example.
Income
statement

Statement
of changes
in equity

Statement
of financial
position

No entry

1 September 2017
Repayment of long-term
loan



1 November 2017
Payment of half-year
interest on debentures
31 December 2017
Payment of interim
ordinary share dividend
30 April 2018
Half-year interest on
debentures accrued
30 April 2018
Proposed ordinary share
dividend
[5]
CD Limited requires an additional $30 000 to pay for an expansion programme.
(e) State one advantage to ordinary shareholders if CD Limited raises the money by issuing
debentures.

[1]
(f)

State one disadvantage to ordinary shareholders if CD Limited raises the money by issuing
debentures.

[1]

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The current ratio of CD Limited on 30 April 2018 was 1.55 : 1.
The company is anxious to increase this ratio and several proposals are being considered.
REQUIRED
(g) State the formula for the calculation of the current ratio.
[1]
(h) Complete the table by placing a tick () in the correct column to indicate the effect on the
current ratio of each proposal.
The first one has been completed as an example.
Increase
Sell surplus non-current assets for
cash

Decrease

No effect



Sell goods on cash terms only
Obtain a further long-term loan
Buy additional non-current assets on
credit rather than paying immediately
Persuade trade receivables to pay
half of their debts immediately in
return for 3% cash discount
Pay trade payables after 2 months
instead of after 1 month
[5]
[Total: 20]

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