18093859 problem solving questions

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COMPILED BY MRS S KHAN EMDC EAST

ACCOUNTING: PROBLEM SOLVING QUESTIONS

GRADE 12 HIGHER GRADE

CLUBS (HG)

QUESTION 1

AA Motor Club has an entrance fee of R100 for new members. Membership fees are R20 permonth per member. The following membership fees account was taken from the books on 30September 2004.

MEMBERSHIP FEES

2003Oct 1 Accrued Income 4802004Sep 30 Income and Expenditure 48 000

_____

48 480

2003Oct 1 Income Received in advance 2402004Sep 30 Bank 47 280

Membership fees written off 240Accrued Income 720

48 480

INSTRUCTION

1. Describe all the transactions from which this membership fees account wasdrawn up. (18)

2. How many members did the club have on 30 September 2004? (3)

3. How many members membership fees were in arrears on30 September 2004? (3)

4. How many members paid their membership fees during the accountingyear? (3)

[27]SOLUTION

1.

October 2003 (Cr.): Membership fees for the current accounting period received during

the previous accounting period, R240.

October 2003 (Dr.): Membership fees still due i.r.o. the previous accounting period,

R480.

September 2004 (Cr.): During the accounting period R47 280 was received i.r.o.

membership fees.

September 2004 (Cr.): Half of the membership fees due on 1 October 2003 was not

received and therefore written off.

September 2004 (Cr.): Membership fees still due i.r.o. the accounting period amount to

R720.

September 2004 (Dr.): The actual income i.r.o. membership fees was transferred to the

Income and Expenditure Account, R48 000. (18)

2. R48 000 R240 = 200 members (3)

3. R720 R240 = 3 members (3)

4. Number of members paid their membership fees during the year.

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R47 280 R240 = 197 members (3)[27]

COMPANIES

QUESTION 1 (Mar 99 WCED)

The following information was extracted from the books of Peninsula Stores Ltd at the end ofits financial years on 28 February.

INSTRUCTIONAnswer the questions that follow. You must show all your calculations. Answers must berounded off to two decimal places.

INFORMATIONExtract from the Income Statement for the years ended 28 February

2005 2004Sales 680 000 620 000Cost of sales 425 000 387 500Net income after tax 66 500 54 800

Ordinary share dividends 30 000 28 000

Extracts from the Balance Sheets on 28 February2005 2004

Ordinary share capital (R2, 00 each) 250 000 200 000Current assets 87 600 75 790Trading sock 45 860 39 110Current liabilities 37 910 40 750

Questions1. Calculate the percentage mark-up on cost that is used by Peninsula Ltd for 2005.(5)

2. Calculate the acid-test ratio for 2005. Comment on this. The acid-test ratio for

2004 was 0,9 : 1. (9)

3. How long will the stock on hand on 28 February 2005 last? Answer in days. (6)

4. Calculate the earnings per share for 2005. (5)

5. Calculate the dividends per share for 2005 (3)

6. What is the main reason for the change in dividends per share, given the following for2004?

Earnings per share: 54,8 centsDividends per share: 28 cents (3)

7. The debtors amount for 2003 is R37 690 and for 2004 was R32 410. Calculate theaverage debtors collection period for 2005 if 50% of all sales are on credit. (6)

8. Name two methods that a business could use to get its debtors to pay sooner. (6)

9. The company issued more shares during the year. Calculate the amount of moneythat the company received if the shares were issued at a premium of 25%. (4)

10. The company had a choice of either issuing more shares or taking out a loan from thebank. Name one advantage for the company of issuing more shares. (2)

11. Would the issue of additional shares have the effect of increasing or decreasing thesolvency of the company? Give a reason for your answer. (4)

/53/

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SOLUTION

1. Gross profit percentage= Gross profit X 100

Cost of Sales 1

= 255 000 X 100425 000 1

= 60% (5)

2. Acid Test Ratio= 87 600 45 860 : 37 910

= 41 740 : 37 910

= 1,1 : 1 5

Ratio improved from 2004 to 2005.

Better than the acceptable ratio of 1:1

Able to meet its short term obligations. 4 (9)

3. Stock Turnover Rate= Average stock X 365 days

Cost of Sales 1= (45 860 + 39 110) X 365 days

425 000 1

= 42 485 X 365 days

425 000 1

= 36,5 days (6)

4. Earnings per share= Net Income after Tax

No. of shares

= 66 500 125 000

= 53,2 cents (5)

5. Dividends per share= Dividends .

Number of issued shares

= 30 000

125 000

= 24 cents per share (3)

6. Increase in the number of shares issued. (3)

7. Average debtors collection period.= Average debtors X 365 days

Credit Sales 1= (37 690 + 32 410) X 365 days

50% (680 000) 1

= 35 050 X 365 days

340 000 1

= 37,63 days (6)

8. Give a discount for early payments.

Charge interest on overdue accounts. (6)

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9. R250 000 - R200 000 = R50 000 (share capital)Therefore, the number of new issued shares= R50 000

R2= 25 000 shares

125% of R2 = R2,50

R2,50 X 25 000 = R62 500 (4)

10 Cheaper than borrowing moneyDo not have to pay money back

Do not have to pay interest on money borrowed any 1 (2)

11. Increase

Cash will increase Total Assets (4)[53]

QUESTION 2 (B/S 96 C3)

You are provided with information extracted from the published Income Statement of WestLimited, public company, together with ratios and percentages calculated from the financialstatements.

INSTRUCTION

All comments must be brief and concise and may be in point form. Where appropriate, youmust refer to specific figures quoted in the question in order to support your answers.

QUESTIONS

1. A number of concepts of generally accepted accounting practice are used inpreparing the published financial statements of a company.

1.1 Explain the concept of materiality, with particular reference to the differencebetween the published and the detailed financial statements of a public company.(6)

1.2 Explain the concept of prudence, with particular reference to its effect on thecalculation of the net income. (6)

2. Consider the operating efficiency of the company. Would you be satisfied with

the effectiveness of the directors in regard to their control of the companysoperations? Explain briefly. (12)

3. Briefly comment on the financial gearing of the company. (Refer to the debt/equity ratio and other relevant figures.) (12)

4. The company wishes to increase the bank overdraft from R10 000 to R40 000as soon as possible. As the Bank manager, would you grant the additionaloverdraft? (12)

5. As the shareholder, would you be satisfied with the overall performance of thecompany. Your answer must focus on the financial indicators which are ofspecific relevance to a shareholder. (12)

[60]

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WEST LIMITEDABRIDGED INCOME STATEMENT FOR THE YEAR ENDED 31 OCTOBER 2004

2004

R

2003

RTurnover 1 370 000 1 400 000

Net income before Disclosable expenses 534 000 475 000

Disclosable expenses (394 000) 295 000

Directors fees 280 000 200 000

Audit fees 16 000 15 000

Depreciation 30 000 31 000

Interest on borrowed money 68 000 49 000

Net Profit before tax 140 000 180 000

Income Tax (65 000) 81 125

Net Profit after tax 75 000 98 875

Notes to the Balance Statement

DISTRIBUTABLE RESERVES

2004R

2003R

Balance 51 575 25 000

Net profit after tax 75 000 98 875

126 575 123 875

Distribution of ordinary share dividends (64 000) (72 500)

Balance 62 375 51 375

Additional Information

2004 2004Number of directors 3 2Number of employees 8 6Market value of shares 510 cents 580 cents

Financial indicators, ratios and percentages calculated from the financial statements

2004R

2003R

Net income before tax on turnover 10% 12%

Net income after tax on turnover 5% 7%

Interest rate on borrowed money 16% 14%

Return on total Equities and Liabilities 11% 13%

Earnings per share 47 cents 86 cents

Dividends per share 40 cents 50 cents

Par Value per share 500 cents 500 cents

Net asset value per share 545 cents 535 cents

Return on shareholders equity 9% 13%

Debt/Equity ratio 0,6:1 0,4:1

Solvency Ratio 2,5 :1 2,8:1

Current Ratio 1,4:1 2,1:1

Acid Test Ratio 0,4:1 0,8:1

Period for which enough stock is on hand 50 days 60 days

Debtors average collection period 40 days 30 days

Creditors average payment period 28 days 30 days

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SOLUTION

1.1 MATERIALITY

Transactions which are not materially in proportion to the nature andextent of the activities of a business are normally not recorded if the

cost and effort of doing so is not warranted.

The concept can also be applied to an item.Important items must be specifically shown in financial statements

whereas unimportant items need not be stressed.

Published financial statements of companies will therefore containless information than the detailed statements and consequently can be

understood by more people. (6)

1.2. PRUDENCE

The concept prudence implies that financial statements be prepared

conservatively. Only income that has been earned without any doubt will be shown

whereas expenses will rather be shown too high than too low.

This results in the net income being shown as low as possible. (6)

2. OPERATING EFFICIENCY

The net income before tax decreased from 12% to 10% and the net

income after tax decreased from 7% to 5%.

The rate of stock turnover however, increased from 6,1 to 7,3. The increase in the rate of stock turnover is encouraging, but the

decrease of the net income in relation to turnover is disappointing. The number of directors and employees has increased and this makes

the above results all the more unacceptable. (12)

3. FINANCIAL GEARING

The debt/equity ratio decreased from 0,4:1 to 0,6:1. Non-current liabilities have therefore increased in relation to own capital,

but not out of proportion.

Return on total equities and liabilities decreased from 13% to 11%.

Interest on borrowed money increased from 14% to 16%. The financial gearing of the company is not good because borrowed money

costs more than what the company earns on equities and liabilities. (12)

4. INCREASE OF BANK OVERDRAFT

Judging by the debt/equity ratio of 0,6:1, the company is creditworthy

(ratio is smaller than 1:1) The current ratio (1,4:1) however, is smaller than the generally accepted

2:1 and the acid test ratio (0,4:1)is smaller than the generally accepted

1:1. In addition to this the debtors collection period weakened from 30 days to

40 days

while the creditors are paid within 30 days (28 days).

Judging by this, I would not grant the additional overdraft. (12)

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5. OUT OF SHAREHOLEDERS POINT OF VIEW

Return on shareholders equity decreased from 13% to 9%.

Unsatisfactory. The earnings per share decreased from 68 cents to 47 cents.

Unsatisfactory. Dividends per share decreased from 50 cents to 40 cents.

Unsatisfactory. As a shareholder I would not be satisfied with the overall

performance. (12)[60]


Ash Limited is registered with an authorised share capital of 80 000 ordinary shares of R10each. The current financial year is from 1 March 2004 to 28 February 2005.

INSTRUCTION

Use the information given and answer the following questions: (Show all calculations wherenecessary)

1. What is the total amount that the company declared as dividends for the current?financial year? (5)

2. Calculate the amount for Income Tax which will appear in the AppropriationAccount during the current financial year. (8)

3. Calculate the amount owing to SARS on 28 February 2005. (5)

4. Calculate the interim dividend per share. (3)

5. Calculate the Retained income for the year. (5)

6. Briefly explain the concept: Retained Income. (3)[29]

Note: No additional shares were issued during the current year and there was noRetained Income on 1 March 2004.

INFORMATION

1 March 2003

Total number of issued shares: 60 000

31 August 2004

Issued a cheque to SARS in respect of payment of provisional Income Tax, R24 000

Paid interim dividend of R30 000

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28 February 2005

A second provisional Income Tax payment of R18 000 is made

A final dividend of R10 000 is declared.

The net income before taxation amounts to R106 000, according to the Profit and LossAccount.

The taxation rate is 40% of net income and 15% of dividends for the year.

SOLUTION

1. R30 000 + R10 000 = R40 000 (5)

2. 40% of 106 000 = 42 400

15% of 40 000 = 6 000

48 000 (8)

3. Paid: R24 000 + R18 000 = R42 000

Amount owing: R48 400 42 000 = R6 400 (5)

4. Dividend per share: 30 000

60 000

= 50 cents (3)

5. Net Income: R106 000

Income Tax (R 48 400) Net Income after Tax R 57 600

Dividends on ordinary shares (R 40 000)

Paid R 30 000Recommended R 10 000

Retained Income R 17 600 (5)

6. The total income need not necessarily be appropriated to shareholders. Part ofincome is usually retained. This amount is transferred to the Retained Income

Account. (3)

BUDGETS


The owner of Craft Furnishers is experiencing problems in the completion of his Cash budgetfor the period 1 January 2005 to 31 March 2005. he approached you at the end of December2004 to help him with, amongst others, the calculation of certain figures.

INSTRUCTIONS

Use the information below in order to answer the questions which follow.

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1. Briefly explain to the owner what a cash budget is, and why it is essential thata cash budget be prepared? (6)

2. Calculate the amounts for cash sales of goods for January and Februaryrespectively (separately). (8)

3. What will the amount that will be paid during March to the business creditors? (2)

4. Provide a clear, step-by-step, calculation of how the amounts owing byDebtors will be collected during January, February and March respectively. (15)

5. Calculate the total amount that will be paid for salaries and wages during March. (3)

6. Use the information from 1.1, 1.6 and 1.7 to calculate the cash in the bank at theend of January and February respectively. (11)

INFORMATION

1.1 Cash at the bank on 32 December 2004 amounts to R8 900.

1.2 The Cash sales of goods during December 2004 amounted to R35 000. It isexpected that cash sales will increase at a rate of 10% per month.

1.3 Credit purchases of trading stock will be as follows:

January 2005 R10 000February 2005 R12 000March 2005 R18 000

Payments to creditors will be 60 days after purchase. Credit purchases of tradingstock for November 2004 and December 2004 amounted to R8 000 and R8 500

respectively.1.4 Credit sales of trading stock to debtors:

January 2005 R24 000February 2005 R30 000March 2005 R36 000

Cash is collected from debtors in respect of credit sales as follows:

10% in the month of sale60% in the month thereafter30% in the third month

The business experiences no bad debts.

Credit sales of trading stock for November 2004 and December 2004 amountedR22 000 and R23 500 respectively.

1.5 With regard to business expenses, salaries and wages will be increased on 1 Marchby R3 000 per month. Total salaries and wages currently amounted to R7 000 permonth for the business three employees.

1.6 The total receipts (budgeted) are as follows:

January 2005 R34 000February 2005 R50 000

March 2005 R56 000

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1.7 The total payments (budgeted) are as follows:

January 2005 R44 000February 2005 R47 000March 2005 R51 000 [45]

SOLUTION

1. The cash budget is a forecast of the effect of the activities of the business on

especially the cash position. The cash budget is also used as a control tool to

ensure that debtors settle their debts promptly. (6)

2. January - 35 000 X 110 100 = R38 500 (4)

February - 38 500 X 100 100 = R42 350 (4)

3. March - R10 000 (2)

4. DEBTORS COLLECTION SCHEDULE

Credit sales January February March

November 2004 22 000 6 600

December 2004 23 500 14 100 7 050

January 2005 24 000 2 400 14 400 7 200

February 2005 30 000 3 000 18 000

March 2005 36 000 3 600

23 100 24 450 28 800

(15)

5. R7 000 + R3 000 = R10 000 (3)

6. Cash In Bank

January February

Total Receipts 34 000 50 000

Total Payments 44 000 47 000

Cash Surplus (Shortfall) (10 000) 3 000

Bank opening balance 8 900 (1 100)

Bank Closing balance (1 100) 1 900

(11)[45]

QUESTION 2 (B/S95 C3)

BACKGROUD INFORMATION

Susans Dress Shop in Ladysmith, is solely owned by Susan Smith. She has been satisfiedwith the results of her business to date. Within the next three months she will move premisesand the business will be required to make a loan repayment of R50 000. Susan is confidentthat she will have no problem in meeting these commitments.

Her reasons for her confidence are:

There is R28 000 in the Bank at the moment and profits over the nest three months will

improve this cash balance. Her creditors have allowed her 60 days to settle her accounts, but she has made a point

of settling them much earlier in order to develop a good reputation for her business.

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She has granted her debtors terms of 30 days but some of them have been slow inpaying. She is confident that she can rectify this minor problem.

She aims to keep between two and three months stock on hand at all times in order toattend to the needs of all her customers.

Being an expert in Accounting, you do not share Susans confidence about her liquidity

situation. Susan has provided you with certain information concerning her business.INSTRUCTION

Study the information provided by Susan to answer the following questions:

1. is Susans Dress Shop in a good or bad liquidity position on 28 February 2005?Quote the appropriate liquidity ratios in your answer. (10)

2. calculate the following at 28 February 2005:

2.1 Period of stock on hand (in days) (4)

2.2 Average payment period by debtors (in days). (4)

2.3 Average creditors payment period (in days). (4)

2.4 Comment briefly on the above calculations. Are these periods appropriate forSusans Dress Shop? (6)

3. Prepare the Cash Budget for the period 1 march 2005 to 31 May 2005. (50)

4. Quote from the Cash Budget in answering the following questions:

4.1 Is Susans Dress Shop likely to experience a liquidity problem within the nextthree months? Explain the main reasons for your answer. (4)

4.2 Susan is hoping to place a full-page colour advertisement in the local press forthe entire month of March and she is hoping to open a second shop in Harrismithin June. In your opinion, should she continue to pursue these plans? What advisedo you offer to solve her cash flow problems? (8)

[90]

INFORMATION

1. The following figures were extracted from the financial statements at the year-end18 February:

2005 2004

Sales (half are on credit) 576 000Cost of Sales 384 000

Interest on loan (16% p.a.) 18 600

Bad debts 10 000

Other overhead expenses 90 000

Inventories (all trading stock) 85 000 75 000

Trade debtors 30 000 38 000

Cash 31 000 15 000

Trade Creditors 29 091 39 091

Loan from Credfin: Current position 50 000 45 000

Long-term portion 55 000 105 000

2. In order to compile her cash budget, Susan has listed her expectations for the next

financial year, commencing on 1 March 2005:

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2.1 The 50% mark-up will be maintained. Suppliers have agreed not to increase pricesfor the next three months.

2.2 Sales volumes for the year ending 28 February 2006 are expected to increase by10%. Cash sales are expected to comprise half of the total sales.

2.3 One sixth of Susans sales take place in March when Ladysmith Town Councilhas its annual dance; the rest of the sales occur evenly over the year.

2.4 Half the trade debtors on 28 February 2005 are expected to settle their accountsduring March. The other half will settle in April. No further bad debts areexpected from this group of debtors.

2.5 Susan aims to get her debtors to pay quicker but does not expect to have immediatesuccess in this regard. She will grant 5% cash discount to her future debtors if theysettle their accounts in the month following the transaction month. She expects 60%of debtors to take advantage of this offer. 36% of debtors should pay in the secondmonth after their purchase and 4% are expected to be bad debts.

2.6 Trade creditors all relate to the purchase of stock. She intends to pay all the trade

creditors in the month following the purchase of stock.

2.7 All stock is purchased on credit. Whenever stock is sold, it is replaced in the samemonth.

2.8 Susan draws R6 000 per month to cover household expenses.

2.9 In terms of the loan agreement, R50 000 will have to be repaid at the beginning ofMay. The interest is calculated and paid monthly.

2.10 the shop will be moving to new premises in April 2005. The expected cost of themove, R15 000, will need to be paid at the time of the move. All other expenses arespread evenly throughout the year. No increases are expected for the next three

months.

SOLUTION

1. Current ratio= current assets : current liabilities= 85 000 + 30 000 + 31 000 : 29 091 + 50 000= 146 000 : 79 091

= 1,84:1

Acid test ratio= Current assets inventories : current liabilities

= 146 000 85 000 : 79 091= 61 000 : 79 091

= 0,77 : 1

Comments

The current ratio is below the acceptable ratio of 2 : 1

The acid test ratio is below the acceptable ratio of 1 : 1

The business will experience problems in meeting its short term obligations

The liquidity situation is unsatisfactory (10)

2.1 Number of days stock on hand= Average stock X 365 days

Cost of sales 1= (75 000 + 85 000) X 365 days384 000 1

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= 80 000 X 365 days

384 000 1

= 76,04 days (4)

2.2 Average debtors collection period= Average debtors X 365 days

Credit sales 1= (38 000 + 30 000) X 365 days

288 000 1

= 34 000 X 365 days

288 000 1

= 43,09 days (4)

2.3 Average creditors payment period= Average creditors X 365 days

Cost of sales* 1= (39 091 + 29 091) X 365 days

384 000 1

= 34 091 X 365 days

384 000 1

= 32,4 days (4)

* all stock is purchased on credit

2.4 Comment

Trading stock on hand sufficient for between 60 and 90 days as planned

Acceptable period because fashions can change very quickly

Debtors take longer (43 days) to pay than 30 days allowed. Credit control mustbe applied more strictly.

Creditors are paid much sooner (32 days) than the 60 days allowed. They shouldrather make use of the 60 day period because this would have a favourable effect

on the liquidity. (6)

3. CASH BUDGET FOR THE PERIOD 1 MARCH TO 31 MAY

MARCH APRIL MAY

CASH RECEIPTS

Cash sales * 52 800 24 000 24 000

Cash from debtors ** 15 000 45 096 32 688

TOTAL RECEIPTS 67 800 69 096 56 688

CASH PAYMENTSPayments to creditors *** 29 091 70 400 32 000

Drawings 6 000 6 000 6 000

Interest on loan 1 400 1 400 733

Repayment: Loan 50 000

Move to premises 15 000

Other overhead expenses 7 500 7 500 7 500

TOTAL PAYMENTS 43 991 100 300 96 233

CASH SURPLUS (SHORTFALL) 23 809 (31 204) (39 545)

Bank balance beginning of the year 28 000 51 809 20 605

Bank balance at the end of the year 51 809 20 605 (18 940)

(50)

Calculations

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* sales (01/03/04 28/02/05) 576 000 X 110% = 633 600March 2005: 633 600 6 = 105 600Cash = credit = 52 800

Other months: (633 600 105 600) 6 = 48 000

Cash = credit = 24 000

** DebtorsMarch: ( x 30 000) = 15 000April: (X 30 000) + 60% x 52 800 x 95%)

15 000 + 30 096 = 45 096May: (36% X 52 800) + (60% X 24 00 X 95%)

19 008 + 13 680 = 32 688

*** CreditorsMarch (balance 28/02/05) = 29 091

April: 105 600 X 100 150 = 70 400May: 48 000 X 100 150 = 32 000

4.1 It seems likely that Susan Dress Shop will experience liquidity problems

by May.

The business will have a shortfall of R18 940 on their current account (4)

4.2 The instalment on the loan and moving costs contribute to the cash flow problem,but the late payment by debtors and early payment to creditors also play an

important role.

She should put plans to open a second shop on hold until the problems at theexisting shop have been solved and the liquidity is acceptable.

Apply for overdraft facilities.See to it that debtors pay within 30 daysPay creditors after 60 daysDecrease drawings

Try to increase cash sales ANY 2 (8)[90]

PARTNERSHIPS


Broadway Traders is owned by two partners, B Broad and W Way.

INSTRUCTION

Provide the missing figures in the Balance Sheet and the accounts denoted by the lettersA R.

INFORMATION

Refer to the following information to answer this question:

The incomplete current account of the partners

The incomplete Appropriation Account

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The incomplete Balance Sheet

The additional information.

GENERAL LEDGER OF BROADWAY TRADERS

CURRENT ACCOUNT: B BROAD

Dr. Cr.

2005Feb 28 Drawings: B Broad C

Balance c/d 35 000

2004Mar 1 Balance b/d 15 0002005Feb 28 Salary: B Broad A

Interest on capital 18 000Appropriation account B

2005Mar 1 Balance b/d 35 000

CURRENT ACCOUNT: W WAY

Dr. Cr.

2005Feb 28 Drawings: W Way 20 300

Balance c/d 45 000

65 300

2004Mar 1 Balance b/d 15 0002005Feb 28 Salary: B Broad D

Interest on capital EAppropriation account 17 300

65 300


APPROPRIATION ACCOUNT

Dr. Cr.

2005Feb 28 Interest on Capital 30 000

Salary B Broad GSalary W Way HCurrent Account: B Broad ICurrent Account: W Way 17 300

2005Feb 28 Profit and loss account F

BALANCE SHEET AS AT 28 FEBRUARY 2005

NOTES R

ASSETSNON-CURRENT ASSETS O

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Tangible assets 3 N

Financial assets 50 000

Fixed Deposit: Dollar Bank 50 000

CURRENT ASSETS R

Inventories 4 P

Trade and other receivables 5 QCash and cash equivalents 6 20 000

TOTAL ASSETS ?

EQUITY AND LIABILITIES

OWNERS EQUITY L

Capital accounts 7 J

Current accounts 8 K

NON-CURRENT LIABILITIES

Loan: Rand Bank M

CURRENT LIABILITIES 150 000

Trade and other payables 150 000Bank Overdraft

TOTAL EQUITY AND LIABILITIES ?

ADDITIONAL INFORMATION

1. Profits/losses are share in the ratio Broad: Way = 3 : 2.

2. The total amount earned by Broad for the year was R73 950.

3. The percentage return on average equity for the business is 35%.

4. The balances on the Capital Account are as follows:

28 February 2004 28 February 2005

Broad R160 000 R200 000Way R100 000 R140 000

5. The debt/equity ratio is 0,5 : 1

6. The current ratio is 3 : 1

7. The acid test ratio is 1,2 : 1[60]

SOLUTION

This question is answered in the sequence to which the question is to be answered.

I R17 300 2 X 3 = R25 950 (4)

Therefore

B R25 950 (double entry principle) (2)

E R30 000 R18 000 = R12 000 (3)

D R65 300 R17 300 R12 000 R15 000 = R21 000 (4)

H R21 000 (double entry principle) (2)

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A R73 950 R18 000 R25 950 = R30 000 (3)

G R30 000 (double entry principle) (2)

C R15 000 + R30 000 + R18 000 + R25 950 R35 000 = R53 950 (4)

F R51 000 + R30 000 + R25 950 + 17 300 = R124 250

OR

35% of average equity

= 35% X (290 000 + 420 000)

= 35% X 355 000

= R124 250 (4)

J R200 000 + R140 000 = R340 000 (3)

K R35 000 + R45 000 = R80 000 (3)

L R340 000 + R80 000 = R420 000 (3)

M R420 000 X 0,5 = R210 000 (4)

R R150 000 X 3 = R450 000 (4)

P 1,2 X R150 000 = R180 000

R450 000 R180 000 = R270 000 (4)

Q R450 000 R270 000 R20 0000 = R160 000 (3)

O R420 000 + R210 000 R150 000 = R780 000

R780 000 R450 000 = R330 000 (5)

N R330 000 R50 000 = R280 000. (3)[60]

QUESTION 2 (B/S95 A1.4)

INSTRUCTION

Prepare the Appropriation Account of the partnership on 31 December 2004and calculate the net profit. [20]

INFORMATION

1. S Stan and S Sure are partners.

2. The partnership agreement stipulates the following:

2.1 S Stan is to get 5% of the total net income as a salary.2.2 Both partners are entitled to interest on capital at 10% per annum.

2.3 The remaining income is to be divided according to the ratio of their capitalcontributions.

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3. On 31 December 2004 the following information was extracted from thePartnership records.

Balances RCapital: S Stan 30 000Capital: S Sure 20 000

Drawings: S Stan 4 000Drawings: S Sure 800

GENERAL LEDGER OF STANSURE TRADERS

CURRENT ACCOUNT: S SUREDr. Cr.

2004Dec 31 Drawings: S Sure 800

Balance c/d 13 000_____13 800

2004Dec 1 Balance b/d 2 400

31 Interest on capital 2 000Appropriation account 9 400

13 800

2005Jan 1 Balance b/d 13 000

SOLUTION

GENERAL LEDGER OF STANSURE TRADERSAPPROPRIATION ACCOUNT

Dr. Cr.

2004

Dec 31 Salary: S Stan 1 500

Interest on capital

5 000

Current account: S Stan 14 100

Current account: S Sure 9 40030 000

2004

Dec 31 Profit and loss account 30 000

_____30 000

[20]

SOLE TRADER


You are provided with information relating to Gateway Stores.

INSTRUCTION

Study the information provided and answer the questions which follow:

1. Is the business a Sole Trader, Partnership or Company? Give a reasonfor your answer. (2)

2.1 Does this business use the perpetual inventory system or the periodic inventorysystem? Explain briefly. (2)

2.2 In your opinion which inventory system offer greater internal control over stock.Explain briefly. (4)

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3 What was the mark-up percentage used by Gateway Stores up to the end of July2004? (3)

4.1 Explain how the mark-up policy of the business changed during August 2004. (5)

4.2 Provide a possible reason for this change in policy. (2)

5. Name the account which will be debited as a result of the entry of R136 000 onthe credit side of the Sales Account. (2)

6. Name the account which will be credited as the result of the entry of R60 000 onthe debit side of the Cost of Sales Account. (2)

7. The business calculates that it has always had Trading Stock on hand for 3months. What will be the value for Trading stock as reflected in the FinancialStatements at 31 August 2004? (4)

8. Which account will be debited as a result of the entry of R31 500 on the creditside of the Asset Disposal Account? (2)

9. In what manner was the vehicle sold, e.g. was it sold for cash, sold on credit,Taken over by an owner or traded in? Give a reason for your answer. (2)

10. How old was the vehicle which has now been sold? State the number of yearsand months. (5)

11. Calculate:

11.1 The depreciation on the remaining vehicle for the year ended 31 August 2004. (5)

11.2 The amount which will be shown as depreciation in the Income Statement forthe year ended 31 August 2004. (3)

12. Briefly explain how the Fixed Asset Register assists in maintaining internalcontrol over fixed assets. (5)

[48]INFORMATION

1. The financial year of the business is 31 August.

2. The Fixed Asset Register reflected that the business had two vehicles at the startFinancial year. The following balances appeared in the General Ledger on

1 September 2003:

Vehicles (at cost) R72 000Accumulated depreciation on vehicles R53 500

3. The depreciation rate on vehicles is 20% p.a. on cost.

4. The following accounts appeared in the general Ledger:

GENERAL LEDGER OF GATEWAY STORES

SALES (N1)Dr. Cr.

2004Aug 1 Balance b/d 880 000

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31 ? DJ8 136 000Bank CRJ8 72 000

COST OF SALES (N2)Dr. Cr.

2004Aug 1 Balance b/d 660 000

31 ? DJ8 102 000? CRJ8 60 000

ASSET DISPOSAL (N5)

Dr. Cr.

2004Aug 31 Vehicle GJ8 45 000

2004Aug 31 ? GJ8 31 500

Drawings: Brown GJ8 14 500

SOLUTION

1. Partnership refer to Asset Disposal Account: Drawings: Brown (2)

2.1 Perpetual Inventory System: use of Cost of Sales (2)

2.2

Perpetual inventory system the Trading Stock account is written up daily andshow how much Trading Stock should be on hand. This can be checked bymeans of stocktaking. It is best used for businesses dealing with valuable itemsand businesses selling large volumes of merchandise with a relatively low unit(bar codes used)

Periodic inventory system is used for businesses that deal in large volumes ofgoods with relatively small unit price. The cost of sales can only be calculatedafter a physical stock account is done.

Marks to awarded according to motivation. (4)

3. = (880 000 660 000) X 100660 000 1

= 220 000 X 100 660 000 1

= 33 1/3 % on cost (3)

4.1 Credit sales

= (136 000 102 000) X 100102 000 1

= 34 000 X 100102 000 1

= 33 1/3 % on cost

Cash sales

= (72 000 60 000) X 100

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60 000 1= 12 000 X 100

60 000 1

= 20% on cost (5)

4.2 Try to encourage cash sales because money is received on time and it involves

less administration is needed for cash sales (2)

5. Debtors Control (2)

6. Trading Stock (2)

7. Average stock= Cost of Sales X Number of months stock on hand

12

= 822 000 X 3

12

= R205 500 (4)

8. Accumulated depreciation on vehicles (2)

9. Taken over by partner. Refer to entry: Drawings: Brown (2)

10. Years = Accumulated depreciation X 100Cost X Rate

= 31 500 X 100

45 000 X 20

= 3,5 years

= 3 years 6 months (5)

11.1 = (72 000 45 000) X 20 X 11 100 1

= 27 000 X 20 X 1 1 100 1

= R5 400 (5)

11.2 = 72 000 X 20 X 11 100 1

= R14 400 (3)

12. Details of every vehicle and every item of equipment owned by the business arein an Asset Register. This information can easily be checked. The total cost of allthe vehicles owned by the business appears in the vehicles account and the totalcost of all the equipment owned by the business appears in the Equipment account.

(5)[48]

ASSET DISPOSAL (HG)

QUESTION 1 (B/S 90 F1.3)

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INSTRUCTION

Study the ledger accounts given below and answer the following questions:

1. Calculate the rate of depreciation applied to vehicles. (5)

2. State the method of depreciation applied to vehicles (2)

3. Calculate the book value of vehicles on 28 February 2005 (9)

4. Calculate the book value of vehicles on 31 August 2004 (4)

5. Calculate the Profit or Loss on the sale of vehicles on 31 August 2004 (4)

6. What amount will appear in respect of Depreciation in the Profit and LossAccount on 28 February 2005? (4)

[24]INFORMATION

GENERAL LEDGER OF WESTSTAR TRADERSBALANCE SHEET ACCOUNTS SECTION

VEHICLES


2004Aug 31 Asset Disposal 27 000

ACCUMULATED DEPRECIATION ON VEHICLES

2004Aug 1 Asset Disposal 22 950

2004Mar 1 Balance b/d 38 400Aug 31 Depreciation 1 350

NOMINAL ACCOUNTS SECTIONASSET DISPOSAL

2004Aug 31 Vehicles 27 000

2004Aug 31 Accumulated depreciation on

Vehicles ?Debtors Control 9 000

SOLUTION

1. Depreciation for half year on vehicle sold = R1 350

Depreciation for 1 year = R1 350 X2 = R2 700

R27 000 X 100

R 2 700 1

= 10% (5)

2. Fixed Instalment Method. (2)

3. Balance 1 March 2004 81 000

Disposal of asset (27 000)

Balance 31 August 2004 54 000

Accumulated depreciation 28 February 2005 (22 200)*

R31 800 (9)

* Balance - accumulated depreciation 31 August 2004

(39 750 22 950) 16 800

Depreciation (10% of 54 000) 5 400

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R22 200

4. Cost 27 000

Accumulated Depreciation (22 950)

R 4 050 (4)

5. Profit = 22 950 + 9 000 27 000 = R4 950 (4)

6. Depreciation for the year = 1 359 + 5 400 = R6 750 (4)[24]

CONTROL ACCOUNTS

QUESTION 1 (B/S 94 D6)

The General ledger of Jason traders was destroyed in a fire. Hereafter is the completeDebtors ledger for October 2004.

DEBTORS LEDGER OF JASON TRADERS

E STRACHAN

DATE DETAILS FOL. DEBIT CREDIT BALANCE

2003OCT 1 Account rendered b/d 660

3 Inv. 112 DJ8 260 920

6 C/N C18 DAJ8 40 88018 Rec. 24 CRJ8 400 480

Rec. 24 Discount allowed CRJ8 20 460

20 Bank debit note CPJ8 400 860

Journal voucher discount cancelled GJ8 20 880

S LAMBERT


2003OCT 1 Account rendered b/d 1 420

5 Rec. 20 CRJ8 600 820

Rec. 20 Discount allowed CRJ8 30 790

14 Inv. 114 DJ8 1 040 1 83020 Journal voucher interest GJ8 30 1 860

22 C/N C27 DAJ8 65 1 795

M KRIEL


2003OCT 1 Account rendered b/d (80)

10 Inv. 113 DJ8 280 200

24 Rec. 26 CRJ8 280 (80)

28 Journal voucher account transferred GJ8 80 0

SOLUTIONGENERAL LEDGER OF JASON TRADERS

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BALANCE SHEET ACCOUNT SECTIONDEBTORS CONTROL (B7)

Dr. Cr.

2004

Oct 1 Balance

(660+1 42080) b/d 2 000

31 Sales (260+280+1 040) DJ8 1 580

Bank CPJ8 400

Journal Debits

(20+30+80) GJ8 1304 110

2004

Nov 1 Balance b/d 2 675

2004

Oct 31 Bank and discount

(400+20+600+30

+280) CRJ8 1 330Debtors allowances

(40+65) DAJ8 105

Balance c/d 2 675_____4 110

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18093859 problem solving questions

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