SINGAPORE INSTITUTE OF MANAGEMENT

UNIVERSITY OF LONDON
PRELIMINARY EXAM 2016

PROGRAMME : University of London Degree and Diploma Programmes

(Lead College: London School of Economics & Political
Science)

MODULE CODE : AC1025

MODULE TITLE : Principles of Accounting

DATE OF EXAM : 26/02/2016

DURATION : 3 hours and 15 minutes

(including 15 minutes reading time)

TOTAL NUMBER : 16
OF PAGES
(INCLUDING
THIS PAGE)
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INSTRUCTIONS :-

DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU

ARE TOLD TO DO SO.
Candidates should answer FOUR (4) out of the following SEVEN questions:
QUESTION 1 of Section A, QUESTION 2 of Section B, ONE (1) Question from
Section C, and ONE further question from either section B or Section C.

Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.

Extracts from compound interest tables are given after the final question on this paper.

8-column accounting paper is provided. If used, it must be attached securely inside the
answer book.

A calculator may be used when answering questions on this paper and it must comply in
all respects with the specification given in the University of London External Degree
General Regulation. The make and type of machine used must be stated clearly on the
front cover of your answer book.

Candidates are strongly advised to divide their time accordingly.

AC1025 Principles of Accounting Page 1 of 16

SECTION A:

SHORT QUESTIONS IN FINANCIAL AND MANAGEMENT ACCOUNTING

Answer all four parts of Question 1 (25 marks in total).

Question 1(a)

Company A, a furniture retailer, owns the following items of inventory at 31

December 2015:

Product 1: 5 tables each of which cost $500. Mark-up on this product is

60%.

Product 2: 20 chairs the normal selling price of each is $80. 5 of these

chairs were damaged in an accident and they are being offered
in ‘the sale’ at $15 each. Normal margin on these chairs is
55%.

Product 3: 10 beds each of which cost $700. 4 of these beds are offered
for sale at normal selling price and the other 6 at $600 each.
Normal mark-up on these goods is 30%.

Required:

(a) Calculate the statement of financial position value of inventory using generally
accepted accounting principles.
(4 marks)

(b) Calculate the total expected loss to the company caused by the accident
affecting Product 2 and the write down affecting product 3.
(2 mark)

Total: 6 marks

AC1025 Principles of Accounting Page 2 of 16

Question 1(b)

Extracts from the most recent accounts of Company B are given below:

2015 2014
$ $
Sales 425,000 368,000
Cost of sales 342,000 302,000
Gross profit 83,000 66,000
Inventory 61,000 58,000
Trade receivables 85,000 60,000
Trade payables 65,000 52,000

Required:

(a) Calculate the following ratios for 2015 and 2014:

(i) gross margin
(ii) inventory period
(iii) trade receivables period
(iv) trade payables period
(2 marks)

(b) Explain briefly how each of these four ratios might be used by potential
shareholders as a part of an evaluation of the company.
(4 marks)

Total: 6 marks

AC1025 Principles of Accounting Page 3 of 16

Question 1(c)

The following information is available for a factory which houses the assembly,
finishing and machining departments:

Assembly Finishing Machining

Department Department Department
Floor areas 40,000 sq ft 35,000 sq ft 25,000 sq ft
Number of employees 150 100 50
NBV of machines $1,800,000 $1,200,000 Nil

During the month of January 2016, the factory incurred the following indirect
overheads:

Rent $50,000
Heating and Electricity $25,000
Indirect labour $70,000

The management have decided to allocate the above indirect overheads using the
following bases: floor areas for both rent and heating and electricity, and number of
employees for indirect labour cost.

As the machining department’s task is to look after the machines in the assembly and
finishing department, the management feel that it should be re-allocated to the
assembly and finishing department based on the NBV of machines.

Required:

Calculate the allocated overheads to the assembly and finishing departments based on
the information available above.

Total: 6 marks

AC1025 Principles of Accounting Page 4 of 16

Question 1(d)

The standard cost card of a storage unit contains the following information, based on a
monthly production of 1,000 units:

Per unit $
Selling price 300
Materials 10 kg @ $15/kg 150
Labour 5 hours @ $10/hour 50
Contribution 100
Fixed overheads 80
Profit 20

The actual results for the month of January 2016 are as follows:

$
Sales 1,100 units 319,000
Materials 10,500 kg 168,000
Labour 5,700 hours 54,150
Contribution 96,850
Fixed overheads 85,000
Profit 11,850

Required:

(a) Calculate
(i) the material price variance
(ii) the material usage variance
(iii) the direct labour rate variance
(iv) the direct labour efficiency variance
(v) the fixed overhead expenditure variance

(b) comment upon these variances including any possible interconnection between
them

Total 7 marks

AC1025 Principles of Accounting Page 5 of 16

SECTION B

Answer QUESTION 2 from this section and not more than a further one question. (You are
reminded that four questions in total are to be attempted with at least one from Section C.

Question 2

Answer both parts of the question in this section.

The balances below have been extracted from the accounting records of Gibbs
Limited at 31 December 2015:
Dr Cr
$ $
Bank account 18,000
Cash in hand 200
Share capital: 600,000 ordinary shares of 10c each 60,000
: 40,000 6% cumulative $1 preference shares 40,000
Share premium 33,000
Provision for doubtful debts at 1 January 2015 2,500
Retained profits at 1 January 2015 50,600
4% Debentures 2021 48,000
Interim dividend paid on ordinary shares 4,800
Interim dividend paid on preference shares 1,200
Taxation 600

Freehold land, at cost 54,000

Buildings at cost 114,000
Buildings: accumulated depreciation at 1 January 2015 18,000
Administrative expenses 41,600
Bad debts written off 1,100
Purchases 89,440
Sales 240,000
Sales expenses 6,100
Fixtures & fittings at cost 66,000
Fixtures & fittings: accumulated depn at 1 Jan 2015 30,000
Inventory at cost at 1 January 2015 42,200
Trade payable 18,900
Trade receivables 138,000
Debenture interest 960
559,600 559,600

You are given the following information:

1. Inventory at 31 December 2015 cost $47,000. Included in the inventory are

items which cost $1,400 which are now obsolete and are expected to be sold
for $200.

2. Fixtures and fittings purchased in 2013 for £12,000 were sold in 2015 for
£9,000. The proceeds had, in error, been credited to ‘sales’.

The question continues on the following page

AC1025 Principles of Accounting Page 6 of 16

 3. Depreciation on non-current assets is to be charged as follows:
Freehold land: no depreciation is charged
Buildings: 1% per annum on a straight-line basis
Fixtures & fittings: 25% per annum on a reducing balance basis

It is the policy of the company to provide a full year’s depreciation in the

year of acquisition and none in the year of disposal.

4. At 31 December 2015, the freehold land has been valued at $250,000. The
directors wish the valuation of the land to be incorporated into the
accounts.

5. A bad debt of $4,000 is to be written off.

6. The provision for bad debts is to be revised to 5% of trade receivables.

7. A final dividend of 2c per ordinary share is to be proposed by the directors.

8. The dividend on the cumulative preference shares, due to be paid on 1

January 2016, is to be provided.

9. Corporation Tax of $20,000 on the current year’s profits is to be provided.

10. Interest on the debentures due to be paid on 1 January 2016 is to be

provided.

Required:

(a) Prepare an income statement for the year ended 31 December 2015, a
statement of financial position at that date and a statement of movements in
equity for the year in good style for the directors of Gibbs Limited.
(17 marks)

(b) Advise Blatter and Platini, the company’s directors and the principal
shareholders who are considering expansion and wish to raise further finance
for the business. Blatter believes that a bonus or ‘scrip’ issue of ordinary
shares, is the optimal solution, while Platini has been advised that a ‘rights’
issue of ordinary shares would be more suitable. Compare and contrast these
two means of issuing ordinary shares and advise them of the effects and
implications of these two means of share issue and include in your advice any
other means of raising capital you believe should be considered.
(8 marks)

Total 25 marks

AC1025 Principles of Accounting Page 7 of 16

Question 3

The statements of financial position of Chamberlain Corp as at 31 December 2014

and 2015 and a summary of the income statement for the year ended 31 December
2015 are given below:

Statement of financial position at 31 December

2014 2015
$’000 $’000
Non-current assets
Land and buildings 37,000 45,000
Plant and machinery 16,500 18,500
Investment at cost 6,000 6,000
59,500 69,500
Current Assets
Inventory 11,412 13,631
Trade receivables 12,784 10,987
Cash at bank 4,713 -
28,909 24,618
Total assets 88,409 94,118

Liabilities and equity

Current Liabilities
Bank overdraft - 490
Trade payables 13,812 15,713
Corporation tax 1,800 250
Interest payable 200 250
15,812 16,703

Non-current liabilities: Debentures 13,000 2,800

Total liabilities 28,812 19,503

Capital and Reserves

$1 ordinary shares 20,000 28,000
Share premium account 10,000 12,000
Revaluation reserve 3,000 8,000
Retained profits 26,597 26,615
59,597 74,615
Total liabilities and equity 88,409 94,118

The question continues on the following page

AC1025 Principles of Accounting Page 8 of 16

Summary income statement for the year ended 31 December 2015
$’000
Profit before tax
(after depreciation on plant and machinery of $2,400,000) 10,518
Tax 2,000
Profit after tax 8,518
Dividends 3,500
Retained profit for the year 5,018

You are given the following information:

(1) During the year several machines were disposed of for $2,200,000. These
machines had a combined original cost of $4,000,000 and had a total net book
value of $2,000,000 on the date of disposal

(2) On 1 January 2015, a bonus share was issued to shareholders for every 4
ordinary shares they held. This bonus issue was entirely financed by the
available profits. A further share issue was made on the 30 September 2015.

(3) Included in the profit before tax was an investment income of $1,250,000 and
an interest expense of $510,000.

Required:

(a) Prepare a cash flow statement for Chamberlain Corp for the year ended 31
December 2015.

(17 marks)

(b) Reply to the following questions put to you by one of the directors of the
company:
“Can you please explain to me how we have a healthy profit yet our bank
overdraft has reached a record level? Surely there must be something wrong
with the profit calculations.” (5 marks)

(c) What are the main advantages to shareholders of a cash flow statement.
(3 marks)

Total 25 marks

AC1025 Principles of Accounting Page 9 of 16

Question 4

(a) Cazorla’s Sales Ledger control account at 31 December 2015 and the list of Sales
Ledger balances at that date do not agree. You establish the following:

1. Balance on Sales Ledger control account $95,852

2. Total of the list of all Sales Ledger balances $92,084 .

3. The list of balances includes $1,380 owing by Kane Limited. This has been
incorrectly listed and should have been 3,380.

4. The company failed to record amounts received from customers on 31

December totalling $2,878 in the Control Account although these sums were
reflected in the individual customers’ accounts.

5. In December, goods sold to Lloris Products for $360 were incorrectly recorded
in that customer’s account as $260, while in the Control Account, the correct
entry was made.

6. In November, the company received a refund of $1,210 from a supplier for

goods returned as defective. This was wrongly treated as a payment by a
customer

Required:

(i) draw up a Sales Ledger control account showing any corrections needed

(ii) show how the list of balances is to be corrected.

(7 marks)

(b) The following items were identified in the course of reconciling the bank
statements and the accounting records of Bellerin Ltd at 31 January 2016.

1. The balance in hand per the cash book was $139,200.

2. Cheques deposited into the bank account and entered in the cash book
before 31 January 2016 of $68,100 were not cleared by the bank until after
this date.

3. A favourable balance of $70,200 had been carried forward from the foot of
page 117 to the top of page 118 as £97,200.

4. Cheques sent to suppliers and entered in the cash book before 31 January
2016 of $110,520 were not presented for payment until after that date.

5. $34,200 received from a customer by direct bank transfer on 31 January

2016 was not entered in the cash book until 1 February 2016.

6. Bank charges of $108 have been entered twice in the cash book.

The question continues on the following page

AC1025 Principles of Accounting Page 10 of 16
Required:

(i) Give calculations to show the corrected bank balance per the cash book at 31
January 2016
(ii) Prepare a bank reconciliation statement at that date
(8 marks)

(c) Welbeck plc wishes to raise $900,000 of finance and has identified two available
alternatives:

1. Issue 600,000 shares at a price of $1.50 per share

2. Issue $900,000 of 8% loan stock at par.

The simplified statement of financial position of the company immediately before

raising the additional finance is as follows:

Non-current assets 2,700

Current assets 1,200
Total assets 3,900

Current liabilities 900

Equity:
Ordinary shares of $1 each 2,400
Retained profits 600
3,000
Total liabilities and equity 3,900

The company at present earns a return on capital employed of 15% and expects this to
continue.

Required:

(i) Prepare a simplified statement of financial position to show what the position
would be immediately after each of the above alternatives has been
implemented
(4 marks)
(ii) Compute and comment on the earnings per share and gearing raios at the end
of the first year after raising the finance under each of the two alternatives.
(6 marks)

Total: 10 marks

AC1025 Principles of Accounting Page 11 of 16

SECTION C

Answer ONE question from this section and not more than a further one question. (You are
reminded that four questions in total are to be attempted with at least one from Section C.)

Question 5
Ozil has been given a task to prepare a cash and production budget for the first six
months of 2016 on the first day of his new job as a management accountant
trainee. The following forecast information was prepared for the business some
months ago:

Dec Jan Feb Mar Apr May June

2015 2016 2016 2016 2016 2016 2016
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Expected sales 200 280 308 385 462 294 378
Administration expenses 32 30 25 40 46 36 39

(1) The company normally adds a mark-up of 40% on the cost price to arrive at
the selling price for all its products.

(2) It is expected that 30% of each monthly sales are in cash. The remaining sales
are offered with a one-month credit period. Credit customers usually pay in
full in the month after the sales are made. However, past experience shows
that at least 5% of those outstanding debts in each month is irrecoverable and
are to be written off as bad debts.

(3) Purchases made from suppliers are paid in the same month in which the
purchases are made.

(4) It is the company’s policy to keep a closing inventory level in each month
which represents 20% of the next month’s sales.

(5) Administration expenses are paid in the same month in which they are
incurred.

(6) A depreciation charge of £10,000 will be allocated for each of the next six
months.

(7) Selling expenses, which are paid one month after they are incurred, are
estimated to be 5% of the monthly sales figures.

(8) A loan of £600,000 was taken out on 1 January 2015. The interest rate has
been fixed at 10% per year for 10 years. Interest is payable at the end of each
month.

(9) The opening cash balance on 1 January 2016 is £12,000.

(10) The sales in July are expected to be £266,000.

The question continues on the following page

AC1025 Principles of Accounting Page 12 of 16
Required:

(a) Prepare a purchases budget for each of the six months from January to June
2016, in columnar form.
(3 marks)

(b) Prepare a cash budget for each of the six months from January to June 2016,
in columnar form
(8 marks)

(c) Prepare a projected income statement for the six month period ending 30 June
2016.
(8 marks)

(d) Discuss the contrasting results from the income statement and the cash budget
and suggest action(s) would you consider to improve the cash situation of the
company?
(6 marks)

Total 25 marks

AC1025 Principles of Accounting Page 13 of 16

Question 6

Ramsey Ltd manufactures and sells widgets. It uses an actual costing system in which
units costs are calculated on a monthly basis using the continuous-weighted average
method. The company is planning to produce 240,000 units for the year 2016. The
standard cost card per unit is given below.

$
Direct labour cost 8
Direct material cost 14
Production overheads 5
Selling and administrative costs 3

The production overheads are all, apart from a charge of depreciation for plant
and machinery, directly associated with the production. The plant and
machinery used for the production was purchased for $7,200,000. It has a
useful life of 10 years and is expected to produce 240,000 units per year. The
depreciation charge allocated to production overheads is absorbed on a per-
unit basis.

Included in the selling and administrative cost is a fixed centrally-allocated

administrative expense which is $2 per unit.

The company sold 15,000 units and 21,000 units in January and February
respectively. Each unit was sold for $40.

There is no opening stock at the beginning of 2016.

Required:

(a) Prepare a detailed monthly income statement for January and for February
using absorption costing. (10 marks)

(b) Prepare a detailed monthly income statement for January and for February
using marginal (variable) costing. (10 marks)

(c) Give calculations to show why the net profit for each of the two months is
not the same in your answer to (a) and (b) above. Explain your answer.
(5 marks)

AC1025 Principles of Accounting Page 14 of 16

Question 7

Giroud plc is considering two alternative investment opportunities. Each of the two
projects has an expected life of five years and requires an initial investment of
$100,000.

A feasibility study costing $5,000 examining the benefits and costs of Project A has
been undertaken and paid for. It is expected that the machine will be sold for
$32,000 at the end of the project. Additional working capital of $8,000 is required
during the life of the new machine; this is expected to be recovered at the end of the
project.

Cash savings arising from Project A are expected to be as follows:

Year Project A
$
1 35,000
2 30,000
3 30,000
4 20,000
5 20,000

A feasibility study relating to Project B costing $14,000 has been contracted for but
not yet completed or paid for. This machine will be scrapped at the end of its life.
Cash savings in each of the five years are expected to be $26,000. The company’s
cost of capital is 12%.

Required:

For each project unless stated otherwise:

a) compute the net present value (6 marks)

b) compute the ‘Internal Rate of Return’ of Project B only? (6 marks)

c) compute the accounting rate of return based on the average investment

(3 marks)

d) compute the payback period based on actual cash flows (2 marks)

e) explain what you consider to be the advantages and disadvantages of each of

the four models used in (a), (b), (c) and (d), above (4 marks)

f) on the basis of the results of (a) to (e) above, which of the two projects do you
consider to be the better and why? (2 marks)

(g) what other factors do you consider might be taken into consideration in this
decision other than simply adopting one or more of these appraisal techniques?

(2 marks)

Total 25 marks
AC1025 Principles of Accounting Page 15 of 16
 Present value of $1
P

%
R 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621

%
" 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402

Annuity of $1

% 1 2 3 4 5 6 7 8 9 10
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791

% 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991

END OF PAPER

AC1025 Principles of Accounting Page 16 of 16